DeFi insurance is one of the bad sectors in the crypto space. Insurers always find it difficult to use traditional insurance coverage to insure against potentially damaging DeFi and crypto events. If you cannot understand the risks associated with DeFi insurance, you are likely missing out on insurance claims.
We cover the wild west of DeFi insurance and present a viable option for you.
What is DeFi insurance?
DeFi insurance is not far from traditional insurance as it protects individuals from financial losses caused by adverse events. Such adverse events can include hacks, exploits, and smart contract bugs.
DeFi insurance comes in handy when you want to protect yourself from losing money on the DeFi platform. If you lose money, you can use the DeFi insurance protocol to claim a certain sum as compensation. However, you must pay an insurance premium for coverage based on a variety of variables such as: B. the duration of the policy and the type of exploit.
So how exactly does DeFI insurance work?
In DeFi insurance, liquidity providers lock capital into different liquidity pools known as capital pools. The person providing the coverage can choose which protocols they want to cover.
Existing DeFi insurance protocols cover specific DeFi risks, typically smart contract failures or exchange hacks. This is mainly done through staking out specific projects, an approach that puts the entire stake on the line in the event of failure. The person providing the coverage earns interest based on the number of funds tied up in the capital pool.
While DeFi insurance is a clear necessity, there aren’t many DeFi insurance protocols that permanently solve the insurance problem. The solutions create a zero-sum game by transferring one investor’s misfortune to another.
There is a higher risk between the deployed assets and the insured project. Additionally, project pools are capital inefficient as they require a fully collateralized position to provide coverage. The risk of permanently losing staking always remains the same. In addition, DeFi insurance policies are created for specific projects for a specific period of time, covering only specific events.
A viable option
Fairside’s solution to the lack of insurance in the Crypto world is non-insurance. It shares the cost of unfair Crypto loss events among its members.
Fairside Network aims to develop a decentralized, sustainable model based on the proven business model of the traditional insurance industry. Funds are locked in a smart contract and can only be unlocked with a consensus vote of the community. The community is focused on supporting members with immediate needs arising from unfair crypto loss.
However, many issues with other DeFi insurance protocols remain to be resolved.
Vincent Munene is a freelance writer and a huge blockchain enthusiast. Blockchain has changed his life in terms of financial freedom and in return he likes to educate people and update them on everything blockchain related. He is a biochemist by profession and also enjoys playing the piano.
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