Why Buy Coverage for Your Digital Assets?
Until recently, DeFi had no insurance alternatives to provide customers with tranquility while dealing with new financial investments. Having that said, there has always been something missing in the crypto space, that is peace of mind in the form of insurance. However, this is beginning to change. Let's find out how Defi insurance will be implemented in the blockchain space in the article below.
Why Do We Need DeFi Insurance?
Just as cryptocurrency exchanges have become a favorite target for cybercriminals, mirroring Bitcoin's growth in popularity, so have DeFi protocols. Last year, as the DeFi space ramped up activity, CipherTrace reported a $2.7 billion loss due to hacks and fraud. While this is still lower than the $4.5 billion loss in 2019, it is still causing concern.
2021 doesn't get off to a better start. On February 5, one of the most popular DeFi platforms – Yearn Finance – suffered a loss of $11 million. Without going into more detail, it's called a quick loan attack, of the exploit type. Just like in the video game industry, it is a form of hacking, but one that identifies and exploits an existing vulnerability in a given system.
If this sounds familiar, that's because Yearn Finance is the same DeFi platform that was reported to have fixed an attack vector for a fast loan exploit last November. The protocol that was unfortunately hacked was then Harvest Finance, with users losing $30 million worth of tokens from their accounts. These facts point to a sobering reality – even being unprepared for similar exploits in the past was enough to erect a waterproof barrier against them.
Like crops and the unpredictability of weather, the only course of action is to use insurance as a stabilizing force. Andre Cronje, the founder of Yearn Finance, has informed affected investors who have been insured that they will all be reimbursed.
One can read this as a signal for all DeFi participants to get insurance. While Yearn Finance's native YFI token has since recovered, it suffered a 12% drop in value shortly after the quick loan mining.
In addition to malicious attacks, it is worth noting that sometimes funds can be lost. In the crypto space, nothing is 100% error-free and 100% of the time. For these reasons, any serious DeFi stakeholder should consider entering into an insurance policy as soon as possible.
DeFi Insurance's Uniqueness
While such insurance does not protect against losses incurred as a result of stock trading options, it will protect against lost funds or assets. In the US, Congress established the Securities Investor Protection Corporation (SIPC) to protect investments from bankrupt brokerage firms. Furthermore, the SEC and FINRA assist investors with fraud-related matters.
The point here is that traditional finance has significantly more protection and security (and regulation) than the DeFi space.
Keeping in mind that DeFi mining is rare, they remind us that Ethereum is a programmable blockchain. And that offers flexibility that inevitably comes with holes. Just because governments will probably never mandate insurance for DeFi protocols, that doesn't mean we shouldn't take advantage of the concept. If the DeFi space wants to surpass traditional finance as its most ardent supporters, here are the picks to get started in this emerging insurance market.
Nexus Mutual and Nsure.Network
As intimated by Cronje in his tweet post-mining attack, the Nexus Mutual is becoming the top choice for DeFi coverage. Managed through its NXM token, it is decentralized Ethereum-based insurance that uses risk-sharing pools. Both parties ensure all smart contract losses on Ethereum.
Make sure to read their detailed claims page, including what is excluded from coverage. To gauge if it's worth it, as of March you can cover 10 ETH for about 0.1281 Ether (ETH) on Curve Finance for 180 days, corresponding to a ~1.3 premium %. If you are using MetaMask, you can easily connect to it and claim your coverage. Unfortunately, mostly anonymous DeFi viewers will be disappointed because Nexus Mutual requires KYC (know your customer) ID verification.
However, if you want to preserve the originality of the cryptocurrency, Nsure.Network offers permissionless coverage. Starting from Mutual's staking in risk-sharing pools, this alternative is based on capital extraction. That is, the insurance price is predicted by the real-time capital supply and insurance demand of that particular DeFi platform. They call themselves the DeFi version of Lloyd's London dynamic pricing model. Coverage is met by purchasing NSURE tokens which are awarded automatically on each block.
DeFi insurance is still immature
Along with these projects, Union Finance is another permissionless alternative to Nexus Mutual that promises to extend insurance beyond mere smart contract loss. In practical terms, Nexus Mutual is positioned as DeFi insurance with the largest market share. Undoubtedly, later this year, we will see which insurance solution gives users the most confidence.
Remember that these are smart contracts that include smart contracts. As such, they can also be mined – as we saw with Cover Protocol at the end of 2020. Finally, Binance – the exchange Cover covers – has refunded users for 10 worth of lost tokens. millions of dollars.
However, recently, Yearn Finance ended its merger plan with Cover Protocol. So it makes sense to expect a lot of trial and error before the end of the year.
Finally, it is appropriate that we end with the topic we started with – NFTs. They represent a secondary market like stocks in traditional finance. In turn, this means that NFT insurance smart contracts can also be traded. It's almost as if all of DeFi's gears (which have never been so slow) align into place.
Conclusion
Until recently, DeFi customers didn't have much of an option except to accept the dangers of utilizing these platforms and accept the reality that there is unlikely to be any redress or recompense if something goes wrong. Users may now purchase insurance plans against a variety of situations, including smart contract vulnerabilities, flash crashes, hacks, and exit scams, thanks to DeFi insurance like Nexus Mutual and Nsure.Network.
Users will benefit from insured DeFi tools, goods, and platforms as these insurance choices become more integrated into the DeFi, and will be able to explore much of the space safe in the knowledge that if anything goes wrong, they'll be completely protected.