Individuals may lose their money due to flawed DeFi infrastructure. DeFi insurance can give them coverage for their crypto assets. Here's how
Decentralized finance (DeFi) is increasingly becoming popular among crypto enthusiasts. But the industry still faces obstacles that prevent its widespread adoption. One such obstacle is the threat of capital loss. The concept of DeFi insurance is tackling this issue.
DeFi insurance enables users to secure their assets through smart contract development that pools funds from different individuals. Let us understand more about this concept in this article.
DeFi insurance is a protection against losses that can happen within the DeFi ecosystem involving stakes and assets. This type of insurance includes handling claims and assessing risks among DeFi members.
Even though DeFi crypto insurance is still a developing market, it is gaining recognition in numerous industries. It can provide safer and more convenient options for those seeking insurance.
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Instead of purchasing coverage from an individual or a company, users acquire coverage from a decentralized network of coverage providers.
Anyone can participate as a coverage provider by locking up their capital in a designated pool of funds. By doing so, users essentially become liquidity providers.
As a coverage provider, users can choose the events or protocols for which users wish to offer coverage. For instance, users might have a high confidence level that a particular exchange will not experience a security breach. Consequently, users are comfortable providing liquidity to the capital pool that specifically covers that event.
In the event of exchange hacking, individuals who purchased coverage against such an occurrence will get compensation. The exchange will utilize the funds within that capital pool.
It exposes investors to risk, therefore they earn interest on the capital that they give as a coverage provider.
DeFi insurance protocols often utilize a Decentralized Autonomous Organization (DAO) framework. Within this framework, holding the token associated with the insurance protocol grants users governance rights. It allows users to participate in voting processes to approve or reject claims.
In some cases, claims are automatically verified instead of being subject to community voting. Oracles, decentralized mechanisms that authenticate external data, facilitate this verification process.
Oracles can precisely monitor the outcomes of specific events and disseminate this information across the internet. This functionality proves valuable for DeFi insurance protocols as it helps minimize the likelihood of disputes arising.
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From risk assessment to security, here is a list of all the benefits of DeFi insurance:
Smart contract technology revolutionizes risk management by offering more efficient methods. In traditional insurance, companies rely on actuarial calculations to evaluate risk. In contrast, decentralized insurance systems leverage algorithms to automate this process.
As a result, setting up a policy becomes significantly faster. Enjoy the benefits of streamlined procedures and save time with decentralized insurance solutions.
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The insurance industry often faces challenges due to false claims. It may lead to excessive payments and increased expenses for claims adjusters, investigators, and litigators. However, decentralized insurance systems can mitigate such situations in the process.
By leveraging decentralized technology, these systems can introduce transparency and automation, reducing the likelihood of fraudulent activities. As a result, decentralized insurance minimizes the opportunity for external manipulation, promoting a more efficient and reliable claims process.
Smart contract technology streamlines the claims process by automating payment procedures, ensuring efficient and timely settlements. Additionally, insurance companies are leveraging artificial intelligence algorithms to price policies.
Further, they tailor coverage terms based on comprehensive data analysis, leading to fairer and more personalized insurance offerings.
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We have enlisted the use cases of DeFi insurance below:
Since mid-2016, there have been three highly publicized instances of "hacks" targeting Ethereum smart contracts. In all these cases, individuals lost substantial amounts of money due to actions that contradicted the code's original design.
To address these concerns, the Ethereum community has greatly benefited from a safety mechanism known as Smart Contract Cover. This product provides compensation in the event of "unintended code use that leads to a significant financial loss." It serves as a guarantee, instilling user confidence that their funds are safeguarded against potential issues.
Furthermore, it boosts developers' confidence in deploying contracts, knowing that there is an additional layer of protection for both parties.
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Collateral Protection Insurance plays a significant role in providing borrowers and lenders with a sense of security within cryptocurrency lending networks. Thereby, it promotes the wider adoption of blockchain technology in today's volatile market.
In a typical crypto loan scenario, the insurance contract acts as a safeguard. It ensures loan repayment if the borrower's designated collateral is lost or stolen.
A notable example of decentralized insurance in action is the consortium by Etherisc and other companies, including Nexo, Sweetbridge, and more. This consortium aims to protect and secure collateralized crypto-backed loans. It demonstrates the innovative and collaborative efforts within the industry to mitigate risks associated with lending in the crypto space.
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The cryptocurrency market is susceptible to cyberattacks and fraudulent schemes like rug pulls. So, investors are increasingly seeking measures to safeguard their investments.
Among the various options available, crypto insurance stands out as a reliable solution. It offers a guarantee to reimburse funds even in the event of a catastrophic incident.
Considering the inherent volatility of the Bitcoin environment, crypto insurance becomes particularly crucial. The rising value of cryptocurrencies, such as Bitcoin, has led to significant thefts from online wallets and exchanges.
For instance, in January 2018, a staggering $500 million worth of cryptocurrency was stolen from the Japanese crypto exchange, Coincheck. More such incidents have created a fragile ecosystem, which conventional banking systems either disregard or fail to address seriously.
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Businesses like Etherisc have recognized the need to address the risk of cryptocurrency wallet theft during attacks and have developed solutions. In a survey conducted by Etherisc, a significant number of consumers expressed the need for insurance coverage for their wallets. It highlights a gap in the market for such solutions.
Here, crypto wallet insurance can become a valuable application of DeFi to provide coverage for a substantial amount of funds. It leverages the principles of decentralization to offer enhanced security and protection for cryptocurrency users.
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The following are some platforms for DeFi insurance:
Bright Union is a decentralized finance insurance aggregator that covers various markets. Users can find the best option using their analysis.
Bridge Mutual is a DeFi insurance provider for smart contracts, centralized exchanges, stablecoins, and more. The platform gives coverage in exchange for profits and yields.
Unslashed is a DeFi insurance provider that covers various products, protocols, and markets. It provides instant liquidity to risk underwriters and insurance buyers.
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DeFi insurance is a fast-growing industry due to its transparency and security aspects. Its market offers room for growth and expansion due to emerging DeFi applications and uses.
If you are interested in developing a DeFi insurance platform, then our developers can assist you. Contact our skilled blockchain developers today to discuss your project idea.
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