One article to understand DeFi insurance, which is indispensable for open finance

Banking, securities and insurance are the troikas that support the operation of the traditional financial industry. The banking industry is currently valued at US$8.4 trillion, the securities industry is currently valued at US$100 trillion, and the insurance industry is currently valued at US$5.5 trillion (data from Statista and the World Federation of Exchanges).

In the insurance industry, not only are institutions the largest policyholders (Bank of America spends an average of $400-$700 a year on $1 million in general liability insurance), but the insurance companies themselves, as asset managers, inject a lot of liquidity into the market . According to Goldman Sachs’ 2022 Insurance Survey, the funds managed by the global insurance industry are as high as 26 trillion, which shows the important position of insurance in traditional finance.

In the blockchain financial market, various protocols need to obtain liquidity through pledge mining to complete their core functions, which is also one of the biggest differences between DeFi finance and traditional finance. Therefore, most users will identify important roles based on TVL data, and DEX, lending, and cross-chain bridges rank the top three in the DeFi market.

However, since the development of DeFi insurance, only Nexus Mutual, which was established in 2017, is still running stably, and it is also the current leader of the insurance track. The entire track shows a trend of weak development and low attention.

So, why stress the importance of only 1% coverage of TVL?

As a brand new field in the encryption industry, the risk of project running away, the risk of protocol loopholes, the risk of Token, the risk of supervision… Risks are bottomless pits that cannot be seen. According to The Block, a total of $1.44 billion will be stolen from various protocol vulnerabilities in 2021.

Therefore, the slow development of DeFi insurance is not because there is no market. Through research, the reasons are as follows:

  1. The development of insurance in traditional finance has its own lag, and the same is true for DeFi finance;
  2. high threshold
  3. low liquidity;

What is the overall development of DeFi insurance in today’s crypto market, how is the development of insurance projects, and is there any innovation? 7 O’Clock Capital based on market research, sort out as follows.

1. Insurance Mechanism and Development Overview of DeFi Insurance

(1) Insurance operation mechanism

Insurance is a tool for pooling capital and socializing large losses so that participants do not go bankrupt in a catastrophic event.

According to the contract, the insured pays the insurance premium to the insurance company or the third party bearing the insurance. When the loss stipulated in the contract occurs, or when the contract expires, the beneficiary will receive compensation.

The healthy operation of the insurance system is based on two main assumptions:

1. The law of large numbers

Although the probability of insured loss is difficult to capture and calculate, as long as the number of units is large enough, random events will recur in large numbers, and eventually certain laws will emerge.

One article to understand DeFi insurance, which is indispensable for open finance

2. Risk sharing mechanism

Insured loss events are infrequent but high-impact events, so the number of participants should be large enough to transfer the risk of an entity’s potential loss to the average of a set of entities.

(2) Comparison between DeFi insurance and traditional insurance

Traditional insurance is managed by a centralized insurance company, which insures assets such as people, things, and traditional finance, and its algorithms and core claim mechanisms are non-public. The insurance policy is borne by the institution, and the risks and benefits are borne by the institution.

DeFi insurance is managed by the DAO organization. All insurance purchases and claims are executed by smart contracts to protect various on-chain assets. The algorithm is open and transparent. The insurance policy is borne by the community, and anyone can become an underwriter, take risks and obtain benefits.

With DeFi insurance, the risk control of decentralized finance is complete.

One article to understand DeFi insurance, which is indispensable for open finance

(3) Implementation methods of DeFi insurance

In DeFi insurance, there are five main components and roles: capital pools, DeFi insurance platforms, insurance buyers, underwriters, and claims assessors.

1. Fund pool

All the money for traditional insurance comes from centralized institutions. Its business model is to sell insurance and invest with the buyer’s money, and to minimize the probability of claims through meticulous actuarial techniques.

DeFi insurance is different. The money for each policy comes from a liquid pool of funds. Like DeFi lending and mining, each user can play the role of an institution and inject liquidity into different insurance projects to form a capital pool. Insurance buyers purchase insurance from the capital pool, and also obtain claims from the capital pool to provide Liquid people are looking at the safety of the insurance, so as to obtain investment income.

2. DeFi insurance platform

The basic operation is similar to DeFi lending. As a platform, open various insurance pools, open insurance purchase and underwriting functions to the public, and form various insurance pairs for bilateral users to freely purchase insurance and inject liquidity.

When a claim event occurs, as a neutral third party, functions such as claims are deployed through smart contracts, and the profit model is to charge a certain fee.

3. Insurance buyers

Purchase insurance for various assets, such as centralized institutions being hacked, DeFi protocols being hacked, etc. Choose the appropriate provider, and purchase insurance according to the type of insurance and the length of time. The greater the risk, the more fees to pay.

4. Underwriter

Anyone can become an underwriting provider for an insurance pool. Just like staking to become an LP, users can choose which insurance types to inject funds into on different DeFi insurance platforms, and bear the risk of being claimed (the higher the policy safety factor, the lower the income, and the lower the safety factor, the higher the income), and thus get part of the Insurance premiums as income.

5. Claims Assessor

When a buyer makes a claim, the traditional insurance company determines the loss and decides whether to make a claim, while the DeFi insurance platform will verify it in two ways:

(1) Token holder voting: According to the insurance agreement system, claim assessors will be set up (you need to buy Token), these members will vote according to the claim proposal, and they will make a claim if they pass.

(2) Automatic verification: claims are automatically verified through oracles.

Basic Insurance Interaction Logic

After understanding the five important roles, we can simulate a complete insurance purchase and underwriting scenario, and then we can clearly grasp the interaction logic of DeFi insurance.

One article to understand DeFi insurance, which is indispensable for open finance

The following is an overview of DeFi insurance interactions:

One article to understand DeFi insurance, which is indispensable for open finance

(IV) Types of Insurance Provided by DeFi Insurance

The types of insurance provided by various agreements are different, but basically fall into the following categories:

  1. Centralized Custody Insurance: Provide insurance for users’ assets hosted in centralized institutions;
  2. Smart contract insurance: provide insurance against attacks or failures of various smart contracts;
  3. Crypto Wallet Insurance: Provides insurance against theft of crypto wallets;
  4. Stablecoin decoupling insurance: a series of stablecoins, DAI, etc. linked to the US dollar.

(5) Why is DeFi insurance developing slowly?

As we mentioned earlier, the slow development of DeFi insurance is not because encrypted assets are risk-free. The fundamental reason is that the threshold is high and liquidity is low.

1. High threshold

High development threshold : DeFi projects such as DEX, lending, and Smart Pool have relatively simple economic models and open source code to a certain extent. However, the economic model and project design of insurance rely heavily on actuarial pricing and are extremely complex.

High design threshold : how should risk be priced? In the traditional insurance industry, actuarial is the core department of every institution, and the threshold is extremely high. However, currency price evaluation and smart contracts are very new fields, and it is extremely challenging to test the industry analysis, security audit, and reasonable pricing ability of DeFi insurance project practitioners at different latitudes.

High cost of education : Compared with other staking mining, the insurance gameplay is relatively complicated, so the cost of user education is high and the enthusiasm is not high.

2. Low liquidity

Competing with DeFi revenue : Most of the users participating in DeFi projects are aggressive, with a high proportion of users seeking short-term revenue, and the profit earned by acting as an insurance underwriter is relatively low, so the attractiveness is also low.

High reinvestment risk : Much of the revenue in the traditional insurance market comes from reinvesting collateral into safe investments. In DeFi, what is a safe investment for the capital pool? Putting funds back into a DeFi protocol creates the same risks it is supposed to cover.

Lack of liquidity : The ability to pay DeFi insurance mainly relies on users to inject assets into the capital pool. Based on the above factors, the current DeFi capacity and volume are not large, and the underwriting capacity and underwriting services of a single project are very limited, so liquidity is very limited. Low.

One article to understand DeFi insurance, which is indispensable for open finance

At the same time, the early development of DeFi insurance was very bumpy. At the end of 2020, the P2P insurance project Cover Protocol was additionally issued by hackers due to code loopholes, and unlimited arbitrage led to the market being full of doubts about the insurance track.

However, the financial market is full of resilience and opportunities, and the value of the insurance track cannot be ignored.

2. Insurance agreements in the current market and their operation

The current active DeFi insurance projects are very limited. During the research process, we found that the early leading project Nexus Mutual has been ranked first on the track since its establishment in 2017, and other projects have made minor changes based on its logic. And framework adjustment, but the essence is still inseparable from the Nexus Mutual model, this phenomenon also reflects the difficulty of development and innovation to a certain extent.

Below we’ll show some of the important insurance agreements today, see how they’re innovating and what the data is like at the moment.

(1) Nexus Mutual: DeFi

Official website: https://nexusmutual.io/

Nexus Mutual is the leader and pioneer of Ethereum insurance, and other insurance projects are basically innovations and modifications based on its operation. Knowing about Nexus Mutal is very helpful in clarifying how the entire track is played.

Nexus Mutual is a UK-registered mutual aid company founded in 2017. Its founder, Hugh Karp, has more than 15 years of experience in the insurance industry and has been in touch with Bitcoin in 10 years. Unlike a shareholder-based company, this mutual company is managed by its members, and only members are allowed to trade with the company. Users need to pay 0.002 ETH and complete KYC to become a member before purchasing its policy.

Currently, Nexus Mutual offers three types of insurance, with prices determined by the market:

  1. Token decoupling insurance (across multiple protocols, only Yearn V2 and Curve pools are insured, with 90% odds)
  2. Agreement insurance (single agreement, 100% odds)
  3. Centralized Asset Custody Insurance

One article to understand DeFi insurance, which is indispensable for open finance

Nexus Mutual has more than 100 policy types, and users can insure these contracts with an insurance period of more than 30 days. Each insurance is denominated in the native Token NXM and allows payment in ETH or DAI. Users can also purchase NXM to enjoy governance rights, or pledge NXM to become a claim assessor, and NXM flows into the fund pool.

It is worth noting that NXM can only be traded within members, and can only be circulated in the secondary market if it is replaced by wNXM, but wNXM cannot participate in any governance activities.

When purchasing an insurance policy, 50% of the fee will be injected into the capital pool, and 50% of the fee will be allocated to the pledger as a dividend. If a claim event occurs, the pledger’s Token will be burned proportionally. If the amount exceeds the pledged amount, all of it will be burned. And the agreement as a whole pays for the policy. In order to prevent the collective claim event of a certain type of smart contract from affecting the compensation ability of the entire fund pool, each fund pool has a capacity limit.

To generate revenue, Nexus Mutual currently participates in two protocols:

  1. Staking ETH on Lido
  2. Staking MPL on Maple Finance

One article to understand DeFi insurance, which is indispensable for open finance

One article to understand DeFi insurance, which is indispensable for open finance

Nexus mutual data analysis:

Nexus Mutual’s lock-up volume is 180 million, NXM’s market value is 290 million, and wNXM’s circulating market value is 24 million. According to its public data, we can get two questions through analysis:

1. How insurance can safely increase income and attract funds

As of September 19, the active insurance amount on the platform was 183 million US dollars. The most popular was Convex Finance (21 million), followed by Anchor (20.66 million), and the entire Curve pool (15.66 million), with a total pledge amount of 328 million. The total capital pool after conversion according to the model is 240 million, but the minimum capital requirement (MCR) capital pool covering the current insurance is 254 million, so the number of pledges is not enough.

Figure: Insurance Amount Under Each Agreement

Figure: Insurance Amount Under Each Agreement

On the pledge side, the pledge amount of the whole platform is 328 million, the pledge income is 9.3 million, and the average yield is 2.8%. The most popular protocol is Convex Finance, with a pledge amount of 21.48 million, followed by Aave V2 (14.82 million) and Curve BTC pool (13.75 million).

The top three addresses pledged 67.1% of the total pool:

The first place is the vault of its liquidity provision protocol Armor.fi, which accounts for 34.4% of the total pool and provides 115 million pledges

Second place is founder Hugh Carp with 16.7% of the total pool

The third place goes to the protocol’s Genosis Safe smart contract address, which accounts for 16% of the total pool

Figure: Staking amount under each protocol

Figure: Staking amount under each protocol

At present, it seems that the pledge amount of Nexus Mutual is not enough. Although its total pledge amount is 328 million, due to the leverage effect of pledge, it is not enough to guarantee the occurrence of claims on the whole platform. At present, the pledge income of most protocols is 0%. How to invest reasonably and increase pledge income is the primary task for Nexus Mutual to attract more funds, and it is also a problem that all similar agreements have to face.

2. How insurance can prevent hackers from cheating insurance

On the claim side, the platform has received 121 claims so far, with a pass rate of 24% and a total compensation amount of 7.49 million, with a probability of 3.8%. Among them, the largest compensation is 4.99 million, which is Rari Capital’s insurance policy (Rari Capital’s insurance policy has been delisted on the platform).

Figure: Nexus Mutal top ten payouts

Figure: Nexus Mutal top ten payouts

Rari Capital’s policy directly led to 66% of claims on the platform, which is a very interesting case.

The policy was purchased on April 7, 2022, with an amount of nearly 5 million US dollars. Then, on April 30, Rari Capital was hacked and 80 million was stolen. On May 12, the purchaser applied for a full claim and passed.

The incident is so compact, we can’t help but wonder if the insurance buyer is the hacker himself: first, create a wallet account to buy insurance for assets; second, attack the protocol to take away the wallet including his own funds; finally, make an insurance claim and defraud the funds.

Although Nexus Mutual implements the KYC function, it cannot directly prove the relationship between the insurance purchaser and the hacker, so the hacker can deceive the insurance.

How DeFi insurance solves the following two problems is the key to the growth of the insurance track:

Only open insurance policies for top DeFi protocols, and the rate of return is not enough to attract a large number of users.

How to do a good job in auditing and risk control is the key point when opening an insurance policy for a non-head DeFi protocol.

(2) Armor.fi: Nexus Mutual Liquidity Release

Official website: https://armor.fi/

One article to understand DeFi insurance, which is indispensable for open finance

Armor is a project initiated by the core developers of the Cover team after they left Cover. Armor is positioned as a distribution agent for Nexus Mutual, providing it with liquidity, transforming DeFi insurance from static insurance to a tradable presence.

The Armor protocol has two main products: arNXM and arNFT (arCORE and arSHIELD have been delisted this year).

1. arNXM: Release NXM liquidity

One article to understand DeFi insurance, which is indispensable for open finance

2. arNFT: release policy liquidity

Armor allows users to exchange Nexus Mutual’s policy for arNFT for secondary transactions.

One article to understand DeFi insurance, which is indispensable for open finance

At present, Armor’s lock-up volume is higher than Nexus Mutual, at 189 million, the highest among all insurance protocols.

(3) Unslashed Finance: Aggregate capital pools to provide risk control for insurers

Official website: https://unslashed.finance/

Unslashed Finance provides insurance for a range of DeFi products, protocols and marketplaces. The operation of the protocol relies on the Unslashed DAO, asset management is based on Enzyme (to provide additional benefits), and independent claims assessment relies on Kleros (to ensure fair results).

One article to understand DeFi insurance, which is indispensable for open finance

The biggest feature of Unslashed Finance is that it aggregates a series of policies of policyholders into a “capital bucket” for underwriters to inject funds to help them spread their risks.

Among them, Spartan Bucket is the first structured insurance product listed on Unslashed and contains 26 policies:

One article to understand DeFi insurance, which is indispensable for open finance

The default maximum risk exposure of Spartan Bucket is 5% of the insurance capacity of each policy. This parameter can be modified through voting by the DAO organization.

Figure: Unslash Finance interaction logic

Figure: Unslash Finance interaction logic

The policy unit of Unslash Finance is ETH, and the current lock-up amount is 22.3 million. The policy amount and pledge amount have not been announced. There are 102 claims incidents with an amount of about 9.8 million US dollars, most of which are UST decoupling compensation in the LUNA incident.

(IV) InsurAce: a platform for a basket of insurance

Official website: https://www.insurace.io/

Founded in 2021, InsurAce is the first to offer cross-chain portfolio insurance. Users can purchase smart contracts, centralized custody, and stablecoin decoupling insurance, covering 137 protocols and compatible with 20 chains.

One article to understand DeFi insurance, which is indispensable for open finance

The process of purchasing insurance for users is similar to online shopping. After selecting all insurance policies, they will check out together in the shopping cart. On the pledge side, the user directly pledges the type of token, and the fund pool corresponds to all policies that own the token, reducing risks and increasing pledge income.

The biggest feature of InsurAce is its capital solvency requirement (SCR), which ensures that the platform can provide compensation to policyholders within the next 12 months with a 99.5% probability of fulfillment, which limits the possibility of falling into financial bankruptcy to 1 in 200.

The SCR value consists of the following 6 elements:

  1. All active policies
  2. All unclaimed bills
  3. Potential but unreported claims
  4. Market Token Impact Risk
  5. Non-life insurance payments and reserves, lapses and catastrophe risks
  6. Potential Operational Risk

To achieve this goal, InsurAce has two asset management divisions: Investments and Insurance.

The capital pool of the insurance department is used to ensure policy repayment ability, and the investment department is responsible for obtaining income and attracting investment. The excess funds from the insurance department will be transferred to the investment department to generate income, and the investment department will act as an umbrella for the insurance department.

Figure: InsurAce Protocol Fund Flow Logic

Figure: InsurAce Protocol Fund Flow Logic

InsurAce is led by DeFiance Capital, with investors including Hashkey Capital, ParaFi Capital, Hahsed, etc.

At present, InsurAce has 16.44 million locked positions, a total historical insurance amount of 345 million, a current active insurance amount of 15.67 million, a capital pool of 15.84 million, and an SCR of 6.51 million. The funds are in good condition.

On the claim side, there were 215 independent claims (74.8% pass rate) and 4 collective claims (50% pass rate), with a total compensation amount of 23.91 million. Among them, the claims incidents are UST decoupling (accounting for > 90%) and Elephant Money protocol hacking. It can be said that LUNA’s black swan event has dealt a blow to the agreement, but its good funding ratio has survived the storm.

(5) Risk Harbor: Automated Insurance Market, Faster Claims

Official website: https://www.riskharbor.com/

Risk Harbor is a transparent and impartial algorithmic insurance protocol driven by a fully automated invariant detection mechanism that automatically judges and issues claims without intermediaries.

One article to understand DeFi insurance, which is indispensable for open finance

Risk Harbor generates insurance prices through AMM, and factors that affect the price include negotiated risk and the amount of insurance sold. Due to the risk-averse design of the protocol, it is natural to want to have a variety of policies, and if the demand for a particular policy is too high, the price will rise.

In order to provide more liquidity for the capital pool, the agreement insurance policies on each chain are gathered in a vault to jointly provide guarantee for all assets on the chain. There are currently 27 contract insurances, supporting Ethereum, Avalanche, Fantom, Aurora, Arbitrium, and Terra2.

If a user applies for a claim, Risk Harbor can automatically identify whether the protocol has suffered a claim event and claim USDC by checking the key invariants on the chain. Based on this, the speed of claims is faster, eliminating the possible perverse incentives for claims assessors and governance members to be policyholders at the same time, and the capacity is greater.

Risk Harbor is currently the most high-quality capital behind it, and Pantera Capital, Coinbase, Digital Currency Group, etc. are all involved.

At present, Risk Harbor has 16.49 million locked positions, and provides 29 types of currency insurance policies. There is no public data.

Chapter Summary : Since the rise of DeFi, many insurance projects have disappeared or been removed from the shelves. The above five projects are projects that were founded earlier, survived to this day, and have a certain size. Through research, it is found that the product differentiation they provide is very small, only slightly different in the positioning of purchasing mechanism, underwriting mechanism, claim mechanism and price.

The development and design threshold higher than any DeFi protocol has led to the situation that Nexus Mutual is still the only one.

How to assess risks and price the insurance agreement is the core element of whether the project can be established. Therefore, it is a huge test for the background and experience of the team. If you just copy the leading algorithm and modify the code slightly, the value is not great.

So what attempts have been made by some emerging insurance projects at present, we have explained in the third chapter.

3. Some attempts of emerging insurance projects

(1) Neptune Mutual: Benchmarking Nexus Mutual, the ambush of capital?

Official website: https://neptunemutual.com/

Neptune Mutual calls itself Nexus Mutual 2.0. Compared with the protocol that requires KYC and only members can participate in, it is a decentralized parameter insurance that does not require KYC and is open to everyone.

One article to understand DeFi insurance, which is indispensable for open finance

The insurance interaction of Neptune Mutual has three roles:

  1. Insurance creator: Project team or community leaders can design insurance for their own projects. Currently, only invited people can create insurance types. To create insurance, you need to destroy 1000NPM and pledge 4000NPM.
  2. Insurance Buyer: Anyone with more than 1NPM can purchase an insurance contract for up to 3 months without kyc. Purchase insurance to obtain cxToken, and after a claim event occurs, all those who own xcToken can receive stablecoin compensation.
  3. Liquidity provider: To provide liquidity to the fund pool requires at least 250 NPM to be injected at the same time. Provide liquidity to obtain POD deposit certificate, which can be used to redeem funds and income. Providing liquidity will generate income from several aspects: policy share, flash loan, loan income (aave, compound), and POD pledge income.

Claim event:

Claims events do not need to be submitted by users themselves, but are reported by “reporters”. Anyone with a certain amount of NPM can become a reporter, by staking a certain amount of NPM and reporting on policies they deem eligible.

During the voting period, the first one who casts a negative vote will become a candidate reporter and needs to stake NPM, and other users need to stake at least 1 NPM to vote. The majority wins (the reporter of that side becomes the final reporter), 60% of the tokens pledged by the losing side will be owned by the winning side, 10% will be given to the final reporter, and 30% will be burned.

At the same time, once a claim event is identified, compensation is available to all those involved in the event, without the need for everyone to file.

One article to understand DeFi insurance, which is indispensable for open finance

The project completed the ETH testnet test at the beginning of this year, and is currently undergoing testing and a second round of code auditing on Avalanche’s testnet.

Compared with Nexus Mutual, Neptune Mutual cannot be called innovation. It can only be said that it replicates the gameplay of Nexus Mutual and cancels the KYC and claims mechanism. But even so, Neptune Mutual has so far received investment from VCs such as Animoca Brands, Coinbase Ventures, Huobi Ventures, OKX, Fenbushi Capital, GSR, Gate, Fundamental Labs, etc.

The agency may hope that its appearance can shake the position of the Nexus Mutal faucet and replace it, but whether it can really challenge the Nexus Mutal remains to be seen, and interested friends can pay attention.

(2) UnoRe: Decentralized reinsurance service provider, an idea

Official website: https://unore.io/

UnoRe comes from Polkastarter, billed as the first decentralized reinsurance trading platform. It was established in 2021 and currently supports Ethetrum, BNB Chain, and Kava.

One article to understand DeFi insurance, which is indispensable for open finance

Reinsurance is a means by which insurance companies sell their own insurance agreements to third parties as a means of risk transfer, so reinsurance companies are also known as insurance companies of insurance companies.

The vision of UnoRe is to provide reinsurance services not only for encrypted assets, but also to break the barriers of traditional reinsurance in a decentralized way, and to put travel and health insurance reinsurance services on the chain, so that every user can participate and gain benefits.

To achieve this, UnoRe will go through three phases:

  1. Investor stage: open a reinvestment pool to the public and break traditional reinvestment barriers;
  2. Risk trading stage: DEX is built, users can tokenize and trade the venture capital in their hands to provide risk liquidity;
  3. Innovation stage: Anyone can create their own insurance product, voted and managed by the DAO organization.

UnoRe is still in its first phase. Its reinsurance pool currently has only one asset portfolio, including two protocols, Umbrella Network and Nord Finance, for users to inject funds into it and pledge to obtain income. Its role is more like a middleman, bridging the protocol and users.

Perhaps because the current insurance market is too small, the demand is insufficient, the reinsurance track is too subdivided, and the development power is insufficient. In April this year, UnoRe also began to sell insurance directly to users and released its own smart contract and stablecoin decoupling insurance. These policies are settled by USDC, which is convenient to package the fund pool and sell it to users in parallel with the reinsurance pool.

At present, UnoRe has more than 30 cooperation agreements, 90 self-sold insurance policies, 1.37 million locked positions, and 480 million US dollars of insurance policies have been sold. At the moment it is actively working with other protocols, NFTs, Metaverse and Gamefi companies, but it is unknown when the so-called reinsurance pool will go live.

UnoRe does not have any financing. Judging from the current product form, it is still far from its vision. There are also doubts about whether it will be able to complete the reinsurance of the traditional industry and realize the decentralized transaction of insurance in the future. But the thinking of its model can indeed give more practitioners some inspiration: Is it possible for traditional insurance to be on the chain?

(3) Bumper Finance: Crypto asset floor price insurance, some small attempts

Official website: https://www.bumper.fi/

Compared with other platform insurance, Bumper Finance should be regarded as a new attempt of encrypted asset insurance: to provide users with Token floor price insurance.

One article to understand DeFi insurance, which is indispensable for open finance

Users can lock the Token in the platform by selecting the token type, policy time and floor price. If the price falls below the floor price, they will receive a claim. The insurer obtains income by staking the stable currency USDC. The project currently supports Ethereum, Avalanche, BNB Chain, and Near.

When purchasing insurance, users can choose a percentage of the current currency price as the floor price, such as 80% and 90%. The higher the percentage, the more expensive the policy will be. If the price falls below the floor price, the user can file a claim and receive that percentage of coins at the price at which the policy was purchased, settled in USDC.

Whether buying insurance or becoming an insurer, you need to exchange and pledge the token BUMP, and the pledge will gain income according to time, and the future token will develop governance rights.

Bumper just completed the alpha test in July this year, and started the community beta test in August. It is expected that Q3 will be open to the public. At present, there is no project that provides insurance based on currency price fluctuations. As the first project in this category, it is relatively new, and you can pay attention to the follow-up data.

4. The future and expectations of DeFi insurance

At present, the projects we have seen are all in-chain insurance, which is an insurance agreement for on-chain capital.

As an asset security track, the core of insurance is security. Model innovation and different mining methods can only be used as additional items.

This is why the status of Nexus Mutual is difficult to shake: entity companies (low risk of running away), early establishment (authority), complete categories (convenience), and crossing the bulls and bears to the present (strength) are all its powerful moats.

Therefore, if you simply do in-chain insurance, you need to meet some conditions if you want to be recognized by the market:

  1. Strong industry background: For example, the head DeFi protocol is born, comes with technology and resources, and is familiar with business logic;
  2. Solid insurance algorithm: mathematics/actuarial elites join to master the core of insurance;
  3. Strong institutional endorsement: first-line VC and Fund screening;
  4. Optimized UX: The operation is relatively friendly, and the user learning threshold is low;

In addition to in-chain insurance, traditional insurance on-chain is also an area worth exploring.

There are two ways to put insurance on the chain:

1. Blockchain native project development agreement, making insurance policies for off-chain assets

2. Traditional insurance companies provide tokenized insurance policies, which users can purchase online

The Etherisc tool platform for insurance development is a tool similar to Aragon in the DAO field, providing developers with a compliant and regulated platform of scalable tools.

At present, its community has developed off-chain asset insurance, and users can purchase on-chain insurance for crops, flight delays, and hurricane events, and obtain on-chain claims.

This form of insurance directly skips the cumbersome interaction process and the pulling of claims with traditional insurance companies, and directly interacts with the wallet.

Figure: Buying flight delay insurance at Etherisc

Figure: Buying flight delay insurance at Etherisc

Another way to go to the chain requires a bold attempt by traditional insurance companies to put their products on the chain.

Not long ago, KKR & Co, one of the largest private equity investment listed companies in the United States (with assets under management of US$491 billion), announced that it will cooperate with Securitize, a digital asset securities company, to tokenize a PE fund and release it on Avalanche.

“We strongly believe in blockchain technology and the role it will play in shaping the future of free markets,” said Dan Parant, managing director and co-head of US private wealth at KKR.

Photo: KKR News

Photo: KKR News

This is not only a bold attempt, but also the intention and determination of traditional assets to seek to enter Web3.

DeFi insurance is still in its infancy, but the future is worth looking forward to:

From the perspective of asset management, whether it is an institution or a user, insurance is a rigid need to diversify the investment risk of encrypted assets;

From the perspective of market expansion, traditional DeFi games are basically exhausted, and funds need to find new blue oceans and places;

From the perspective of industry development, based on the experience of the previous bull market, the next DeFi cycle will be more stable, and more developers will be involved in it.

7’O Clock Capital is always paying attention to the potential and explosive power hidden in different tracks, and is looking forward to the next stage of insurance, and hopes to work with industry partners to discover the gems in the sea.

Thinking and Interaction at the End of the Article: The Impossible Triangle of Insurance

The impossible triangle of the insurance agreement is: user cost, pledge profit, and agreement security.

One article to understand DeFi insurance, which is indispensable for open finance

If the user cost is low and the protocol is kept secure, the staking profit will not be high; if the user cost is low and the staking profit is high, the protocol must be unsafe; if the staking profit is high and the protocol is secure, the cost will be high.

Traditional DeFi protocols must find a balance in the middle, but with the development of various insurance projects and the competition with other DeFi benefits, many DeFi insurances may give up protocol security.

What do you think of the Impossible Triangle? What solutions are there? Welcome to discuss together.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/one-article-to-understand-defi-insurance-which-is-indispensable-for-open-finance/
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.

Like (0)
Donate Buy me a coffee Buy me a coffee
Previous 2022-09-23 11:30
Next 2022-09-23 11:31

Related articles