Decentralized finance (DeFi) is one of the most significant advances in the global cryptocurrency markets, allowing traders and investors to make double/triple-digit returns on their holdings.
Using DeFi applications, on the other hand, carries its own set of hazards, with protocol compromises being very prevalent. Over USD 12 billion was lost in 2021 as a result of DeFi hacks. This is why DeFi insurance is beginning to take a more prominent position in the space.
What is DeFi insurance and how does it work?
Decentralized insurance was created to protect investors in DeFi markets.
Decentralized insurance, like traditional insurance, protects a customer against financial loss caused by a variety of probable circumstances. Certain DeFi traders even purchase insurance to protect themselves against market volatility and to protect their winnings.
DeFi insurance policies are frequently limited in duration, and users are compensated for claimable losses that occur during the policy’s validity period.
Continue reading to learn about a variety of DeFi insurance protocols that protect customers against a variety of losses when using decentralized finance applications.
InsurAce is a decentralized insurance protocol that intends to give users of DeFi applications with insurance services. It offers to safeguard consumers from security threats with user-friendly products with reasonable rates.
Anyone who owns a self-custody wallet, such as MetaMask or Trust Wallet, can purchase covers by connecting their wallet to the InsurAce app. InsurAce offers portfolio-based and bundled coverage options with a variety of various pricing models, allowing customers to insure all of their DeFi assets in one location rather than through multiple protocols and transactions. There is no requirement for a know-your-customer (KYC) process.
InsurAce covers occurrences such as hacking of smart contracts or fund custodians, rug pulls, Initial DEX Offering risk, and when a stablecoin’s pegged price falls drastically below its pegged price. It is compatible with the Ethereum (ETH) and Binance Smart Chain (BSC) blockchains, as well as the Polygon (MATIC) and Avalanche (AVAX) blockchains.
Insurance Against Opium
Opium Insurance is a product of Opium Finance that covers impermanent loss, smart contract hacking, credit default events, stablecoin custodian insolvency, price volatility, Simple Agreement for Future Tokens (SAFT) risks, and off-chain risks for DeFi traders.
Users can purchase or sell insurance as the need arises, selecting from a variety of available policies. Additionally, they might choose to invest in the pools and receive additional interest.
Buyers select an insurance product, pay a premium to the pool, and then receive a tokenized insurance position via the platform. This position is available for trading on the insurance secondary market and can also be utilized to seek a payout if an insurance claim is successful.
Solace is a decentralized finance insurance protocol that offers policies for Aave (AAVE), Compound (COMP), and Uniswap (UNI). It is a risk management protocol for DeFi protocols, giving protection and compensation in the event of a failure.
The protocol intends to assist liquidity providers in mitigating their risk in the event of a smart contract hack.
Solace utilizes a centralized capital pool to underwrite risks across all insurance products. Users that contribute capital to pools receive revenue through policy sales and other protocol-related incentives.
This DeFi insurance platform does not require Know Your Customer (KYC) information and instantly confirms insurance claims within the Solace network, with reimbursements made in a single transaction. It precisely determines how much money a user has lost and compensates them.
Solace is presently only available on the Ethereum network, but the platform aspires to be cross-chain, with ambitions to debut on Polygon, Aurora (AOA), and other Ethereum Virtual Machine (EVM) compatible chains in the future.
Unslashed, which launched in January 2021, is a decentralized insurance system that covers common risks associated with crypto assets. It ensures continuous collateralization by providing practically rapid liquidity to insurance purchasers and risk underwriters.
The DeFi insurance protocol insures cryptocurrency exchanges and wallets, as well as smart contract attacks, stablecoin pegs, and oracle failures, among other risks that traditional insurance would not cover.
Crypto holders, like holders of other decentralized insurance products, can underwrite the risk by depositing funds and receiving interest. At the moment, investors who deposit funds to pools can earn between 4% and 5% on the crypto they deposit with Unslashed.
Unslashed employs Kleros, a decentralized arbitration service, to resolve protocol conflicts for insurance buyers. It uses impartial assessors and arbitrators to conduct claims reviews based on the insurance policy documents and the claimant’s evidence. It asserts that it uses an unbiased and open procedure to ensure that users receive the best service possible.
With more money flowing into DeFi money markets from traditional fixed income products, DeFi insurance products will only gain popularity. While the majority of DeFi insurance protocols are still small, their products have the potential to help stabilize the typically volatile DeFi market and reassure investors before they dive in.
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– According to Moody’s and Gauntlet, centralization was responsible for the majority of decentralized finance hacks in 2021 – Moody’s and Gauntlet’s Top Risks for DeFi Users and Investors