DeFi insurance is one of the flawed sectors in the crypto realm. Insurers always find it difficult to use traditional insurance covers to insure against potential DeFi and crypto events that are detrimental. If you cannot understand the risks associated with DeFi insurance, you are likely to miss out on insurance claims.
We cover the wild west of DeFi insurance and present a viable option for you.
What is DeFi Insurance?
DeFi insurance is not that far from traditional insurance because it protects individuals from financial losses caused by unfavorable events. Such unfavorable events may include hacks, exploits, and smart contract bugs.
DeFi insurance comes in handy when you want to safeguard against losing money on the DeFi platform. If you lose money, you can use the DeFi insurance protocol to claim a specific sum as compensation. However, you are required to pay an insurance premium for the coverage based on a wide range of variables, such as the length of the policy and the type of exploit.
So, how exactly does DeFI insurance work?
In DeFi insurance, liquidity providers lock capital into various liquidity pools known as capital pools. The individual providing coverage can choose which protocols they want to cover.
Existing DeFi insurance protocols cover particular DeFi risks, typically smart contract failures or exchange hacks. This is mainly done by staking certain projects, an approach that puts the entire stake at risk in the event of failure. The individual who provides coverage receives interest based on the number of funds locked in the capital pool.
Even though DeFi insurance is a clear necessity, there are not many DeFi insurance protocols that sustainably solve the insurance problem. The solutions create a zero-sum game by transferring one investor’s misfortune to another.
There Is a higher risk between the assets staked and the project insured. Additionally, project pools are capital inefficient since they require a fully collateralized position to offer coverage. The risk of permanent staking loss always remains the same. Moreover, DeFi insurance policies are created for specific projects for a specified period, only covering specific events.
A Viable Option
Fairside’s solution to the lack of insurance in the Crypto world is non-insurance. It shares the cost of unfair Crypto loss events among its members.
Fairside Network aims to develop a decentralized, sustainable model using the traditional insurance industry’s proven business model. Funds are locked in a smart contract and can only be unlocked with a consensus vote of the community. The community focuses on assisting members with immediate needs resulting from unfair crypto loss.
However, many problems with other DeFi insurance protocols still need to be resolved.
Vincent Munene is a freelance writer and a great blockchain enthusiast. Blockchain has changed his life in terms of financial freedom and in return, he likes to educate people and keep them up to date on everything blockchain. He is a Biochemist by profession and also loves to play the piano.