Talking about DeFi Insurance

Blockchain News , August 6th. At this stage, the decentralized finance (DeFi) industry is developing rapidly. Since the beginning of this year, the scale of encrypted assets locked in DeFi has increased by about four times. At the time of writing, DeFi The total locked position has reached 93.86 billion US dollars. However, a considerable part of these encrypted assets have been stolen in hacking attacks. The decentralized financial projects themselves have also suffered costly losses. Most of the assets cannot be secured, which also makes more and more encrypted assets. Community users began to pay attention to DeFi insurance.


In fact, with the continuous development of the decentralized financial industry, the frequency of such hacking attacks may further increase, which will cause liquidity providers and token pledgers to face serious risks of loss. Since the decentralized financial market is still in its infancy, many users are almost unable to effectively prevent platform vulnerabilities, nor can they avoid malicious actors who use vulnerabilities to carry out attacks. This is not like in the traditional financial market, retail investors and institutional investors can hedge market risks by using options and other derivatives. In addition, they can also choose to purchase credit default swap contracts and insurance to reduce transaction risks. It seems that the option hedging strategy is the only loss protection mechanism available to DeFi users, but this protection strategy is not only complicated and changeable, but also relatively expensive, so it cannot be used as a viable long-term solution.

For a long time, people who dare to try products and services in the decentralized financial industry are basically adventurous, but this field has not actively explored solutions to risk problems (it may also be caused by the courage to take risks). It can be said that the progress of DeFi in insurance is very slow. However, with the increasing popularity of DeFi protocols and more and more problems exposed, the market has become increasingly calling for the construction of DeFi insurance solutions.

Are there any solutions on the market that can protect liquidity providers and pledgers from smart contract hacking?

In fact, there are already projects in the field of “DeFi insurance” management that have given solutions-decentralized financial parameter risk management solutions.

Frankly speaking, the decentralized financial parameter risk management solution can make full use of the automated, transparent and fair claims process to protect encrypted assets without the need for a trusted medium. This is a truly permission-free and open that everyone can access. Financial system. Different from other decentralized protection policies, this program follows a parameterized insurance algorithm, based on the principles of rule, transparency and fairness, and aims to eliminate the need for oracles and third-party agencies, and can provide quasi-instant compensation services.

This kind of parameterized insurance needs to set parameters and determine insurance claims based on specific and predetermined indicators. Compared with traditional insurance compensation policies, parameterized insurance schemes promise to pay indemnities as long as they meet predetermined parameters, and then protect the insured from the occurrence of predetermined events. Once the parameter triggers the claim conditions, the parameterized insurance scheme will automatically settle claims without the claim adjuster to make subjective judgments.

How to participate in Defi Insurance?

Individual users need to purchase the parameterized insurance policy they need. The underwriter can create a risk management pool with specified parameters for the buyer to choose to purchase. The user needs to prepay the total premium and add the funds (premium) to the corresponding underwriter’s risk management proportionally In the pool. Once the exchange is hacked and the user’s tokens are stolen, the policyholder can be protected by the insurance contract, and he can be paid only by submitting a claim. Policy holders can automatically obtain claims within a short period of time after being hacked, and there is no need to perform any manual operations from underwriters to individual policy holders.

Compared with some previous governance-based insurance agreements, this parametric risk management solution has a much higher insurance claims efficiency. Since the insurer of the governance-based insurance agreement maximizes its profits by charging premiums and refusing to settle claims, each claim process is a long confrontation between the insurer and the policyholder. At the same time, those agreements also need to work with risk assessors who participate in claims voting, and risk assessors also play the role of insurers, so they will control claims expenses as little as possible. It is reported that the vast majority of claims in previous governance-based insurance agreements have been rejected.

Going back to Defi insurance, its claim settlement process is free of any human intervention or prejudice, and it can basically complete the claim within one minute. Through this solution, they can also handle large claims without the need to trust intermediaries to participate, which in turn eliminates the possibility of underwriters “weakening” the system, and makes risk protection schemes more combinations possible.

It is worth mentioning that when providing insurance services, the actually paid premium pool (“floating”) can be regarded as a zero-interest loan because it is paid when a claim event occurs in the future. Traditional insurance companies will reinvest the float to earn additional profits, and DeFi risk management agreements can also enable underwriters to perform the same operations. By allowing the underwriters to use almost any asset as underwriting capital, this agreement brings higher returns to the underwriters and encourages more underwriters to invest capital into the agreement, allowing users to pay lower premiums. At the same time, the claim tokens in the agreement can also be used in the underwriting contract, but as the underwriting funds of another contract, this composability creates a complex risk protection product that would otherwise be impossible to achieve. More importantly, because the underwriters can obtain income from other sources, as well as income from underwriting insurance, the premium of this type of Defi insurance will be cheaper than its competitors. 


There have been many hacking incidents in the past year, and as the decentralized financial ecosystem develops more and more complex, malicious attacks are inevitable. This has created a wide range of demand for risk management products, and we need to prevent hacker attacks and mitigate the risks and losses that result from them. At the same time, for mainstream DeFi protocols, strong risk management solutions are crucial, which will help retail investors and institutional investors to invest their funds in decentralized financial protocols more safely.

Many encryption projects have adopted methods that are effective in traditional fields and applied them to the blockchain, but this method does not guarantee a true license-free solution, nor can it capture the true potential of blockchain technology. The true encryption native risk management solution is scalable, flexible and trustless, which kills any other products on the market.

With the increasing number of DeFi attacks and the increasing severity of attacks, the potential of the parametric insurance management model will be further explored, and DeFi insurance based on this emerging model will also play an important role in the entire ecosystem.


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.

Leave a Reply