Decentralized finance (DeFi) is an industry rife with scams and hacks. In 2022 alone, over $60 billion was lost to hacks or exploits. This is why it’s essential to secure your funds. But the great thing is you can use decentralized insurance. Like other DeFi platforms, it’s completely transparent and permissionless. Although this is novel technology I believe it has some serious potential. In this article, we will be delving into the world of decentralized insurance. So without further ado, let’s jump right in.
In this article:
- What is decentralized insurance?
- Why is it necessary?
- Top 3 decentralized insurance platforms
What is decentralized insurance?
DeFi insurance works the same way as traditional finance with one major difference, decentralization. There is not a single authoritative organization making all the decisions and user access is permissionless. You are not denied based on employment history or credit. Instead, anyone with an internet connection and a computer can access the insurance. This is all done automatically through smart contracts.
Why is it necessary?
You guessed it, Hacks. You cannot talk about DeFi without talking about the countless number of hacks. This industry has exploded in the past few years which has attracted some unwanted attention. From the infamous Ronin bridge hack to the collapse of UST. Not only that, but smart contracts can fail due to bugs in the code. Ultimately, decentralized insurance provides a safety net against these issues.
On a side note, it is imperative that you use a hardware wallet to protect against hacks. The one that I personally recommend is the Ledger Series X. You can check out my review here. Also if you want to learn more about the risks associated with DeFi click here.
Automation – decentralized insurance is operating 24/7. Smart contract technology allows claims to be paid out automatically. This skips any arduous administrative process which may hinder the speed of payouts. Ultimately, this creates an extremely efficient system.
Permissionless – as mentioned previously, anyone can access decentralized insurance platforms. Unlike traditional finance, users are not excluded by a central authority based on credit or employment history. This alternative is open to all.
Democratization of power – decentralized insurance platforms is governed by decentralized autonomous organizations (DAOs). Essentially, these are formed by token holders of the platform who vote on proposals to ensure more secure protocol development. In this case the insurance platform. Ultimately, the decision-making is done across the whole community rather than a select few stakeholders. If you want to learn more click here.
Transparent – all transactions on the blockchain are transparent. Therefore, you know if your insurance provider is honoring the terms of the agreement or if they are treating you unfairly.
Top 3 decentralized insurance platforms
Nexus Mutual – founded in 2017 by Hugh Karp, this is a massive project with over $200 million in total value locked up. In essence, it is an Ethereum-based platform driven by community management. The platform works by pooling together funds. Then governance token holders vote on which proposals to payout. At the moment this solution only offers protection against smart contract vulnerabilities. This includes bugs in the code or hacks. However, the disadvantage of this platform is it doesn’t cover phishing attacks or loss of funds.
InsurAce.io – this is also a behemoth in the space with over $300 million covered. Unlike Nexus Mutual this platform is cross-chain with support for both Ethereum and Binance Smart Chain. It also has developed a reputation in the industry with VC backing from the likes of Huobi Labs and Defiance Capital. Not to mention, they offer a whole suite of coverage. This includes protection against smart contract vulnerability, Custodian Risks, and stablecoin de-peg risks.
inSure DeFi – although not as reputable as the other two, inSure DeFi is still a great platform. First of all, it was a pioneer in providing coverage for both NFTs and the Metaverse. Moreover, there is 24/7 support while also providing a payout based on a DAO system. This system utilizes a dynamic pricing model which is based on the volatility of the crypto market. Overall this platform has serious potential.
As you can see decentralized insurance is a promising sector. It offers complete democratization of power which is transparent and open. Not only that, but it is extremely efficient. There is not a long application process or copious amounts of paperwork to deal with. Ultimately, the system is executed by code. In an industry where less than 5% of capital is insured, there is certainly huge potential.