The great potential of DeFi insurance

The great potential of DeFi insurance

No, DeFi cannot fix the finance. At least not yet.

To be considered as an appropriate alternative it must first work on its own failings: better user experience, user responsibility relief, and of course โ€“ an omnipresent and easy-to-use insurance cover โ˜”

With over $6 billion worth of crypto ๐Ÿ’ฐ stolen from DeFi users since its inception (as per DeFiLlama), the last point is crucial, and it is one of the most promising DeFi sectors now.

๐Ÿš€ The potential is huge: only 0.5% of DeFiโ€™s TVL (total value locked), or $231 million, is currently covered.

OpenCover, an on-chain analytics firm specializing in DeFi insurance, has recently released a report on the state of the space, analyzing data from June’22 to March’23 across 7 EVM-compatible chains and 9 main insurers.

Key takeaways:

๐Ÿ“Œ The space is nascent and is yet to develop proper standards. Most players propose different packages covering risks like protocol failures (smart contract exploits, bugs, defective economic designโ€ฆ), stablecoin depegs, bridge covers, audit failures, and even custody cover for the CeFi;

๐Ÿ“Œ 2022 marked the DeFi insurance industryโ€™s first stress test with 90% of all-time claim payouts: $34.4 million in claims were paid out to cover holders, UST depeg and the FTX collapse accounting for $22.5 million and $4.8 million respectively;

๐Ÿ“Œ 9 players share 90% of the DeFi insurance market, with the oldest provider Nexus Mutual owning a lionโ€™s share (80%) of the current underwriting capital (total of $286 million). Other players include Unslashed Finance, InsurAce, Chainproof, Sherlock, Neptune Mutual, Risk Harbor, InsureDAOย and Ease;

๐Ÿ“Œthe biggest covers are sold for Ethereum protocol (Nexus Mutualโ€™s median cover is $100k), but a growing number of smaller retail covers are being sold on Polygon and Arbitrum;

๐Ÿ“Œ the current DeFi cover options are not scalable enough, and many established players are in the process of upgrading their protocols (Nexus Mutual V2, InsurAce V2, Risk Harbor V3), introducing marketplaces to scale capacity and distribution and share risk more effectively.

The DeFi insurance is still tiny compared to the DeFi, which itself is still tiny compared to traditional finance, or even crypto CeFi.

This is what they call โ€œa room to growโ€ ๐Ÿ˜‰