Guarantee DeFi funds: How to find reasonable premiums for DeFi insurance?

Original title: “Looking for a reasonable premium for DeFi insurance”

If you are in DeFi, how much do you expect to lose?

Let us consider the hacking/vulnerability exploits throughout 2020. For the sake of simplicity, we only consider the main factors.

As of 2020, there have been 20 hacking/vulnerabilities, causing a total of 24 million USD in losses. TVL (total lock-in value) is 156 million U.S. dollars by the end of 2020.

Guarantee DeFi funds: How to find reasonable premiums for DeFi insurance?

In 2020, 2.03% of DeFi loss, and each attacked protocol loses an average of 4.6% of TVL

For the sake of simplicity, suppose we think that Alice is the only investor in DeFi, and she invested $156 million in DeFi in 2020. Due to hacking, she lost $24 million in 2020.

Alice’s loss rate is $24 million / $156 million = 2%

what does this mean?

This means that if you invest $100 in DeFi, you are expected to lose $2 for the whole year.

If a protocol is hacked/exploited, how much will it lose?

As shown in the figure above, the TVL loss of 11 projects is as high as 30%, with an average of 4.6%.

This means that if your DeFi project is hacked, you will lose 4.6%.

What do you do to ensure your funds in DeFi and have a good sleep?

purchase insurance.

What is the average DeFi insurance cost?

In order for an insurance company to make a profit, the premium must include the expected loss, which is 2%. Let us give a reasonable figure of 2.6%.

But 2.6% is an average level. We all know that the quality of projects is different based on the team, history, and user base. Blue chip projects should be safer and pay less than 2.6%, while new small projects should pay much higher than 2.6%.

We cannot estimate low premiums for small and new projects, because the risks can be high. But it must be higher than 2.6%.

What should the insurance cost of a blue chip project be?

For blue chip projects, this ratio should be less than 2.6%, because they are safer than normal DeFi projects.

What determines the insurance premium?

  • The possibility of the item being hacked/exploited.
  • The loss rate when attacked/used.

The loss rate of blue chip projects?

Balancer, Compound and Yearn lost 0.3% (US$400,000/US$128 million), 6% (US$90 million/US$163 million), and 1.2% (US$11 million/US$900 million), respectively, in the hacking attack, with an average loss 3.8%.

Guarantee DeFi funds: How to find reasonable premiums for DeFi insurance?

Blue chip projects lost an average of 3.8% during the hack

As mentioned earlier, the average DeFi project is expected to lose 4.6%.

What should the premium of the blue chip project be?

If we do not consider the possibility of the project being hacked, the premium should be (3.8%/4.6%)*2.6%=2.1%.

Therefore, considering the possibility of being hacked/exploited, it can be safely said that a premium of 2% for blue chip project coverage is fair.


Posted by:CoinYuppie,Reprinted with attribution to:
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.

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