Blockchain and cryptocurrency are transforming nearly every industry and it is the same with the insurance sector. The traditional centralized insurance system is not the best fit for your digital assets, traditional insurance services will not even look at crypto investments at this time. This is why decentralized finance (DeFi) insurance has become a trend in the insurance industry, with great opportunities for investors to protect their assets against financial attacks.
What is DeFi Insurance?
DeFi insurance or Decentralized Insurance is the process in which the platform prevents its users from the losses of hacking, smart contract bugs, or other such digital fraudulent activities. DeFi is a blockchain-based technology that has removed the need for financial mediators by replacing them with smart contracts. Among many decentralized financial services are decentralized insurance services, which are not given much attention but are of great importance, and gaining awareness rapidly. Many users encounter the weaknesses of smart contracts and there are plenty of news articles about hacks and bugs. $120 million dollars was hacked last year, and in the first few months of 2021 at least $200 million has already been hacked from DeFi protocols. The malicious actors take advantage of loopholes in the smart contracts and steal millions of dollars from their liquidity pools. DeFi insurance protects from such attacks by providing insurance for wallets and smart contracts.
During past years, crypto investors have faced hacks and also gone through the consequences of mishandling the private keys. DeFi insurance ensures the security and confidence of its users, mitigating the losses.
Difference between Centralized and Decentralized Insurance
Centralized Insurance:
In centralized insurance, the following step is followed to provide insurance
• Risk Assessment
• Premium determination
• Determination of when the liability should be realized
• Assessment of damages/loss to occur
After these steps, the insurance payment is issued to the insured individual.
Decentralized Insurance:
Instead of centralized insurance, where all work is done manually, decentralized insurance is automated. All steps involved in the issuance of insurance are executed by smart contracts, saving users’ time.
Smart Contract Risk:
The decentralized finance structure is exposed to a new risk that is smart contract risk. Some examples are transaction completion failure, oracle attacks, wallets hacks, unexpected collateral liquidation, coding bugs, and many more. According to a report, attackers have pilfered more than $120 M through smart contracts hacks in 2020 alone. This risk is due to bugs in the underlying code of DeFi protocols.
Benefits of Decentralized Insurance:
DeFi Insurance is the name of the security of deposits against these types of loss. In the future, it will offer complete protection against volatility, flash crash, theft, and crypto wallet attacks. This insurance covers technical and financial risk creates a sense of security for investors and boost confidence in the wider DeFi industry by reducing risk. The Defi platform also ensures the safe and reliable process of submitting, claiming, processing and payouts.
DeFi Insurance also provides immediate redemption of tokenized crypto and risk assessments.
In the case of Defi Insurance, you purchase a policy to cover the loss of a specific situation. If you suffer any financial loss, you simply have to inform the concerned insurance company providing DeFi insurance and can get your claimed payment. For example, a platform gets hacked, but it has DeFi insurance. The platform faced a loss of $2M. The platform will inform the insurance company, which will issue the payment to exchange to reimburse the loss of affected users.
Uses Cases of DeFi Insurance:
DeFi insurance has many use cases that can prevent losses.
Collateral Protection for Crypto backed loans:
There are cases in which the borrower provided the collateral which got stolen or destroyed. In such crypto loan mishaps, the insurance company pays the loan. Many platforms are working to safeguard crypto-backed loans.
This provides a sense of security to crypto borrowers and lenders, which is very important for advancing the crypto industry.
Crypto wallet insurance:
Many platforms are working to provide a solution for the crypto wallet in case of attacks. There was a dire need for wallet insurance, but there are fewer options available in the market. DeFi has stepped forward to insure the crypto wallets.
Smart Contract Cover:
DeFi offers to cover the loss if the smart contract is manipulated, resulting in loss of funds or unwanted funds transfer. Now investors and lenders need not worry about repayment or loss.
Know Your Customer (KYC)
There is a conflict between Defi Insurers. Some require KYC information before providing a cover of the loss, while most of the platforms are working without KYC, removing the troublesome feature of centralized insurance.
Choose Coverage:
Many small and big insurance providers are out there, both centralized and decentralized. Decentralized coverage providers offer more transparency and permissionless capabilities. Unlike the centralized providers, where there is no room for community innovations, decentralized providers experiment for community involvement.
DeFi issuers provide coverage for a premium. You can purchase protection coverage against specifics such as protection against smart contracts ricks, multi-sig wallet issues, bugs, etc.
You have an option for a monthly or annual premium versus pay-as-you-go. The coverage providers offer prices depending upon the demand of the system and coverage process.
While there are cases with minimal coverage chances, such as phishing, malware, or private key breaches.
The platforms
Many platforms are working to give DeFi insurance-based coverage. Among those, InsurAce offers one of the widest coverage at the lowest premium.
InsurAce is a new decentralized insurance protocol, to empower the risk protection infrastructure for the DeFi community. InsurAce offers portfolio-based insurance products with optimized pricing models to substantially lower the cost; launches insurance investment functions with SCR mining programs to create sustainable returns for the participants, and provide coverage for cross-chain DeFi projects to benefit the whole ecosystem.
Misconceptions about DeFi Insurance:
Several misconceptions are often heard about decentralized insurance. Some are as follows:
People think that DeFi insurance will somehow magically fix all the innate issues in insurance. It will not happen like this, but it does reduce your risk when investing in DeFi.
There is a misconception that DeFi insurance will eliminate the need for insurance institutions. This may not be the case. There is still their need for accountability and commercial support related to major issues, plus there are reinsurance requirements and more likely there will be a hybrid-solution in the future.
Future of DeFi Insurance:
DeFi insurance will be growing with the digitalization of nearly every insurance product; commercial, asset-related, or individual.
Mr. Mark Caraway, Head of Partnerships at BlockApps, in an interview, said that,
“We will see a pooling of capital from larger groups of people, with lower entry costs required for issuers than in the past where, for example, a single large entity requires millions of dollars in capital to issue. This naturally diversifies the risk associated with the insurance default.”
New products such as parametric insurance and event-based insurance are also expected to launch.
The Bottom Line:
Decentralized insurance is a niche industry with strong transparency and security that it provides to DeFi investors. Currently, there are only a few products available but certainly, this will increase in the future. Decentralized Insurance has reduced the risk of DeFi investment for many and also highlighted the benefits of blockchain.
The centralized giants are still hesitant, but decentralized insurance is competitive with its technological sophistication. The decentralization and transparency will attract the users globally to access DeFi insurance. We are seeing just the beginning now. In the future, it will completely change the view we see and use insurance products and services.
InsurAce platform is a permissionless, blockchain-based DeFi insurance service. InsurAce provides insurance for your smart contracts against hacks enabling users to secure their investments.
Visit now to get insurance for your DeFi investments at InsurAce.io
