DeFi 30-for-30 #9:
Insurance for DeFi.
With the inherent risks in DeFi, how do we mitigate the risks?
The answer is insurance.
Thread ๐๐งต
Insurance for DeFi.
With the inherent risks in DeFi, how do we mitigate the risks?
The answer is insurance.
Thread ๐๐งต
1/ With ever more value pouring into DeFi protocols and ever increasing amounts of money being locked in smart contracts, the risk of users losing these funds become non-negligible.
Various hacks have happened within the short history of existence of DeFi.
Various hacks have happened within the short history of existence of DeFi.
2/ Loss of funds can be due to:
- Smart contract risks - vulnerabilities in the code itself that can be exploited
- Financial risks - flash loan attacks, liquidity risks
- Security breaches - loss of master key, phishing attacks
Losses have amounted to hundreds of millions.
- Smart contract risks - vulnerabilities in the code itself that can be exploited
- Financial risks - flash loan attacks, liquidity risks
- Security breaches - loss of master key, phishing attacks
Losses have amounted to hundreds of millions.
3/ Thankfully, while these risks cannot be eliminated completely, they can be mitigated and shifted away from users, to another entity that pools these risks.
Payments are made by members of the insurance scheme into a pool.
Payments are made by members of the insurance scheme into a pool.
4/ If an unfortunate event that is covered under the contract occurs, members affected can submit claims, similar to how insurance works in the traditional sense.
These claims are then assessed by claims assessors who vote to approve or reject the claims.
These claims are then assessed by claims assessors who vote to approve or reject the claims.
5/ DeFi enables a more transparent process whereby members are allowed to participate in the risk and claims assessment process.
This is in contrast to the traditional insurance industry whereby criteria are opaque, with sometimes arbitrary rules.
This is in contrast to the traditional insurance industry whereby criteria are opaque, with sometimes arbitrary rules.
6/ Typically anyone can be the claims assessor if the person stakes a certain amount of the protocol's required token.
The mechanism might be different between protocols but smart contracts encoded in the protocol disincentivises participants from cheating the system.
The mechanism might be different between protocols but smart contracts encoded in the protocol disincentivises participants from cheating the system.
cont'd >
What do I mean by cheating the system?
for e.g. submitting false claims
There would need to be a consensus to determine if the claim is valid.
What do I mean by cheating the system?
for e.g. submitting false claims
There would need to be a consensus to determine if the claim is valid.
7/ To get coverage, you simply need to sign up as a member of a protocol (usually with a one-time fee). Depending on the rules, KYC may or may not be needed.
You can then start getting coverage using the product you need, decide how long to get covered for and that's it!
You can then start getting coverage using the product you need, decide how long to get covered for and that's it!
8/ Nexus Mutual is one of the most well-known insurance protocols in DeFi.
There are other insurance protocols like Armor, or even on different chains, for e.g. Helmet for BSC.
There are other insurance protocols like Armor, or even on different chains, for e.g. Helmet for BSC.
9/ Smart contracts will redefine how insurance works in the future.
Though most of the protocols now cover DeFi risks, we could see coverage being extended to include other categories such as travel, life and health.
It's a multi-billion industry ripe for disruption.
Though most of the protocols now cover DeFi risks, we could see coverage being extended to include other categories such as travel, life and health.
It's a multi-billion industry ripe for disruption.
TL;DR:
Decentralised insurance protocols offer insurance coverage which are available for users to buy, to protect against adverse events in DeFi.
Decentralised insurance protocols offer insurance coverage which are available for users to buy, to protect against adverse events in DeFi.
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