“Insurance is still a niche market in the DeFi ecosystem. However, as the insurance space matures and institutional players come on board, insurance could become one of the biggest pillars of DeFi.”
The insurance industry is a huge market, with global premiums written totaling $6.3 trillion in 2019. The world is complex, and we are always at risk of some sort of accident. The following is a simple risk management framework that illustrates the steps we should take to address different types of risk.
Individuals should transfer out high-impact but low-frequency risks (such as natural disasters and cancer) and deal with this type of risk through insurance.
Insurance operates on two main assumptions.
One is the law of large numbers. The loss events covered by insurance must be small in frequency, and if the events occur with sufficient frequency, the results will converge to the expected value.
The second is the risk sharing mechanism. Loss events are characterized by low frequency and large shocks, so that the premiums paid by a large group of people subsidize the losses of a few large claims.
In essence, insurance is a tool for pooling capital and socializing large losses so that participants do not go bankrupt in a single catastrophic event.
Insurance socializes the cost of experiencing a catastrophic event, thereby enabling individuals to take on the risk. It is a risk management tool that encourages greater user participation and is critical for the DeFi industry to move beyond its existing segmented audience. the DeFi industry needs insurance products to convince institutional players with large amounts of capital to join.
But at this point in time DeFi insurance is currently at a stage where there are no directors, no regulation, no standards, and no norms.
The opportunity is huge, but the risks remain
“DeFi insurance has many advantages over traditional financial insurance, for example, DeFi insurance is very innovative in terms of enhancing privacy, fairness, asset security, reducing financial costs and de-trusting.
However, at present, Defi Insurance is still mainly focused on the crypto asset industry, and if blockchain technology can be better coupled with the traditional financial industry to solve the problems in the traditional insurance industry with the help of Defi Insurance, its potential and effectiveness is very great.”
The financial attribute of blockchain technology has been one of the most concerned topics. the hotness of DeFi-related industries also reaffirms this point. The traditional financial business of auditing, settlement, collateral and so on can enhance the security and operational efficiency in decentralized technology.
Blockchain smart contract-based credit systems penetrate the financial market through layers and drive its reform may be one of the future trends.
However, as a convergent investment, DeFi insurance, unlike common applications such as over-collateralized lending and spot trading, requires a more stable credit market and interest rate market, which is a challenge for the DeFi ecosystem that is still to be improved in the areas of real-name KYC and credit scoring.
Some experts believe that a key to the future development of DeFi insurance is whether the subject of DeFi insurance is off-chain or on-chain risk.
When the subject of DeFi insurance is off-chain risk, DeFi insurance needs to solve two basic problems: first, off-chain risk is denominated in legal tender, but insurance payout is made with in-chain digital assets, which causes the problem of currency mismatch; second, insurance actuarial and insurance loss determination for off-chain risk can only be carried out off-chain, so the relevant results need to be written into the chain through the prophecy machine.
When the subject of DeFi insurance is an in-chain risk, it is necessary to expand the risk coverage. In addition, although DeFi insurance actuarial and insurance loss determination are technical issues, they can significantly affect the way DeFi insurance is implemented because of the high professional competence required.
“DeFi Insurance is still in a very early stage of development, and its system building and product innovation are just getting started. Excellent projects in the blockchain industry are never short of capital to follow.”
Currently limiting the development of DeFi Insurance are technical factors on the one hand and policy factors on the other. The technical factor is that the openness of the DeFi contract makes the protocol easy to be hacked; the policy factor is that DeFi insurance is still mainly limited to digital assets within the chain assets, and the combination with traditional financial assets still needs both policy and technical support.
DEFI insurance has created a boom
As the DeFi protocol continues to be upgraded and iterated, the DeFi insurance market is rapidly alternating and taking shape, both in terms of code quality and operating model, supporting the growth rate of DeFi lock-in volume. At the same time, there are frequent incidents of DeFi protocols being attacked and resulting in property damage.
“Flash loan attack arbitrage and protocol attacks are affecting the stability of the market and the security of market participants’ assets. The past year has also been a year of various security incidents, with Origin Protocol’s losses worth RMB 45 million due to re-entry attacks and Balancer’s losses worth RMB 3 million due to lightning lending attacks. The importance of insurance becomes even more prominent in the face of the endless number of attacks on smart contracts.
As DeFi has become hot and investors and speculators continue to join, the market has become more competitive and the test for projects and teams has become tougher.
“In the DeFi insurance ecosystem chain, the DeFi project side actually accounts for a lot of weight. A good insurance platform will eventually be favored by most DeFi projects to access and create the corresponding policies, and even take the initiative to update some code-related (e.g., audit updates) messages.
“For a project to stand out from the crowd of Defi projects, it must first be safe and innovative enough from a technical point of view to differentiate itself from other projects and be able to solve industry pain points; secondly, the quality, diversity and activity of the ecology, which is a key factor in the virtuous cycle of any project. “
Forward-looking leaders are also the key to whether a project can walk in the forefront of the industry, quality excellent technology development team is the support to achieve technical feasibility, while the financing and operation team is the blood of the long-term development of the project, “Only a team with the above qualities is likely to stand firm in the fierce competition.”
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/an-article-detailing-the-current-state-and-future-potential-of-the-defi-insurance-market/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.