DeFi insurance, the next hot spot in the DeFi ecosystem?

DEX, liquidity mining, Yield Farming, oracle machines and many other concepts have taken over to fuel DeFi. Will DeFi insurance become the next hot spot? We sorted out centralized insurance and decentralized insurance, as well as the popular leaders of decentralized insurance, and found that…

In this fiery summer, DeFi (decentralized finance) has been developing in full swing in the encryption circle, and many concepts such as DEX, liquidity mining, Yield Farming, oracle machines have taken over to fuel it. The rapid market rotation has also made some players start to think about what are the next hot spots and opportunities in the DeFi ecosystem. Considering the recent rapid expansion of DeFi funds, and the frequent security incidents and extreme risks in the past, DeFi insurance quickly attracted the author's attention.

In the traditional financial field, insurance has a long history and is quite mature. With the rapid development of technology in the times, the insurance industry is also placing more emphasis on digitization and data migration to the cloud, gradually carrying out core system transformation. In recent years, with the rise of blockchain and smart contract technologies, insurance is also regarded as one of the valuable landing scenarios. Thanks to the "trustless" feature, blockchain and smart contracts can not only eliminate the problem of low management efficiency, but also reduce the high cost of governance and supervision, and realize the beautiful vision of "In code we trust". At this stage, because the infrastructure in this area still needs to be improved, the combination of blockchain and smart contract technology with insurance has not yet been truly out of the circle, and it is more of an innovation and attempt in the encryption circle.

The average decline of the DeFi concept sector today is 3.07%: Jinse Finance and Economics shows that the average decline of the DeFi concept sector today is 3.07%. Among the 47 currencies, 4 rose and 43 fell, among which the leading currencies were: SNX (+11.56%), GXC (+3.74%), and TRB (+1.14%). The leading currencies are: LRC (-9.44%), AKRO (-9.15%), SRM (-8.91%). [2021/9/14 23:22:58]

Therefore, focusing on the cryptocurrency market known for its "high risk and high volatility", what types of risks and insurance products currently exist? In a nutshell, risks can be divided into three main categories: market risk, technology risk, and credit risk. Examples can be: black swan extreme market conditions, smart contracts being hacked, project default/running away/self-stealing, etc. The industry is quite risky, but the existing insurance products are still relatively limited. Divided according to the degree of centralization, crypto insurance on the market is mainly composed of the following two categories:

Centralized insurance: It is no different from traditional insurance. Most of them are large-value legal currency insurance policies, which are purchased from traditional insurers by encrypted exchanges, wallets, and custodians. For example, in April 2019, Coinbase said it held a $255 million hot wallet policy, created by Lloyd's registered broker Aon, a group of US and UK insurance companies Launched by a global group that includes certain syndicates of Lloyd & #39;s of London. In addition, BitGo, METACO, Ledger and other companies in the industry have stated that they provide encrypted asset insurance. It is worth noting that this type of insurance is usually denominated in legal currency, and the scope of coverage is described in a vague manner, lacking a good mechanism in terms of flexibility and transparency.

The average increase of the DeFi concept sector today is 1.01%: Jinse Finance quotes show that the average increase of the DeFi concept sector today is 1.01%. Among the 47 currencies, 13 rose and 34 fell, among which the leading currencies were: NMR (+55.15%), SRM (+40.17%), and SWFTC (+24.60%). The leading currencies are: BTM (-8.00%), HDAO (-7.59%), BAL (-6.02%). [2021/5/17 22:09:41]

Decentralized insurance: Compared with centralization, the advantages of decentralized insurance are more trustless, faster repayment, higher flexibility and exemption from intermediary costs. Any financial system needs effective insurance and hedging tools, and the DeFi economy is no exception. Decentralized insurance solutions are an indispensable infrastructure for its development and maturity. It is worth mentioning that although many public chains have recently announced plans to deploy in the direction of DeFi, the DeFi ecology of Ethereum is still the most prosperous at this stage, leading by a large margin with absolute advantages. Therefore, most of this article revolves around the DeFi and insurance situation on Ethereum. It is not difficult to observe that there are currently two main factors driving the demand for decentralized insurance: 1) Since the beginning of 2020, the locked funds in the DeFi field have risen from US$680 million to US$6.8 billion (a compound annual growth rate of 3530 %), achieving an order of magnitude breakthrough; 2) DeFi security incidents and major market changes occur frequently, and the hidden risks are extremely high. Existing DeFi insurance projects are mainly mutual insurance and financial derivatives, the number and types are relatively limited, and there is still a lot of room for development.

KuCoin will list the popular DeFi project ANC at 20:00 tonight: According to KuCoin exchange news, KuCoin will list the Anchor Protocol (ANC) project at 20:00 tonight and support ANC/USDT and ANC/UST trading services, The ANC recharge service is currently enabled.

Created based on the stablecoin project Terra Money, Anchor Protocol is a new type of savings protocol that aims to balance interest rates by coordinating block rewards from multiple blockchains with different PoS consensuses, and ultimately achieve a stable rate of storage interest rate.

Known as an "exchange for all", KuCoin aims to discover global high-quality blockchain projects and provide one-stop services such as currency, fiat currency, leverage, contracts, mining pools, and lending to 6 million users from 207 countries. [2021/3/18 18:57:25]

List of DeFi Insurance Projects    Mapping: Cointelegragh Chinese

Data: The total locked-up volume of the Defi protocol on Ethereum continues to decline: According to the Tokenview browser: as of 15:00 today, the current total locked-up volume of the Defi protocol on Ethereum is about 12.79 billion U.S. dollars, a month-on-month decrease of 1.07%, among which the top three Uniswap: $2.761 billion, down 4.45% month-on-month; Maker: $1.971 billion, down 2.38% month-on-month; WBTC: $1.582 billion, down 1.52% month-on-month. [2020/11/4 11:37:48]

The Nexus Mutual and Opyn projects are currently representatives of DeFi insurance platforms, providing decentralized insurance services in the form of mutual fund pools and option derivatives respectively. The specific differences between the two are shown in the following table from multiple dimensions.

Drawing: Cointelegragh Chinese

Nexus Mutual's first product is smart contract insurance, which only covers "unintended use of code." When the specified smart contract is hacked and there is a major loss (more than 20% of the insured amount), the insured member can make a claim. The smart contract works normally as expected, and the loss of assets due to other external factors is not covered by the insurance. The platform currently supports 32 smart contracts on Ethereum, and the three projects with the largest insured amount are Curve, Yearn.Finance and Syntheix. Compared with the huge locked-up funds of US$6.8 billion on Ethereum DeFi, the insurance scale of Nexus Mutual is relatively limited. Since its operation in May 2019, the total insurance amount of the platform is US$37.76 million, and the premium is US$280,000. The only claim that Nexus Mutual passed was the two lightning loan attacks suffered by bZx in February this year, while more than 20 other claim applications were rejected. Multi-million dollar loss event.

BTC Advocate: If DeFi interacts with the underlying Ethereum, it may lead to more negative consequences: Encryption industry entrepreneur, well-known author and BTC advocate Andreas Antonopoulos recently said that for now, no one can guarantee DeFi smart contracts on Ethereum There are no bugs at all, and if something goes wrong, no one knows how these bugs will interact with the underlying Ethereum platform and cause negative consequences to what extent. Although Ethereum has advantages and flexibility, it still cannot compare with Bitcoin in terms of security. This means that investment may encounter various risks, such as a sudden increase in Gas prices, which may lead to other related problems. All of these things can result in the loss of some, or even all, of your invested capital. In addition, building complex DeFi systems and applications on Ethereum will also lead to a larger attack surface, so for some Bitcoin holders, choosing to invest funds in DeFi platforms is more risky than simply holding Much bigger. [2020/7/13]

Data source: Nexus Mutual, drawing: Cointelegragh Chinese

On the design level, as its name implies, Nexus Mutual is a community-based insurance platform, where members pledge the platform token NXM to form an asset pool, and participate in the risk assessment of the corresponding smart contract, insurance pricing, claim voting and Platform governance and other processes. While the pledger earns income (premium sharing), it also faces related risks (repayment loss). At present, the total value of NXM pledged on the platform is 195 million US dollars (accounting for nearly 3% of DeFi), and the three contracts of Compound, Uniswap and Curve have the highest number of pledges, which means that participants believe that these DeFi projects are relatively safe and have a good profit-risk ratio.

Opyn is different. Simply put, it is a decentralized (no custody) option agreement, which provides hedging insurance services for asset price changes through options. Compared with options products on centralized exchanges, Opyn has the natural advantage of not requiring permission and trust, and insurance buyers do not need to worry about counterparty risks because the seller needs to over-collateralize. The oToken (such as oETH) generated during the seller’s mortgage process can be sold to earn premiums (option premiums), or added to the Uniswap liquidity pool to earn transaction fees (provide liquidity). The platform currently supports option products in two currencies, ETH and YFI, with a locked position of USD 110 million. Opyn is also insured on Nexus Mutual for its smart contract technical risks, albeit for a negligible amount.

DeFi insurance has accumulated strong growth potential in the past few months, and it is also facing broad development prospects in the future. However, based on the current situation, there are still many difficulties that need to be solved at this stage. First of all, the encryption market has been born for more than 10 years. It can be said that it is still in the early stage of rapid change. It is actually difficult to quantify and adjust the market's understanding and estimation of risks. Second, the range of risks to be protected is limited. At present, a single platform underwrites a single type, and community-based operation projects are decided by member voting, which is suitable for simple deterministic events, and high-level risk assessors and pricers are often required for difficult situations. Finally, there is the issue of liquidity. The profit-risk ratio of the pledge determines whether the platform can attract enough participants. When the liquidity scale is insufficient or changes rapidly, the corresponding insurance coverage will also have greater uncertainty.

It can be expected that in the next few years, there will be more and more innovations and attempts in the field of encrypted insurance. Not only will there be more combinations in the encrypted world, but it is also hoped that it will be connected with real-world scenarios and become a supplement to the traditional insurance industry. Alternatives. At the same time, the traditional world will dispel many concerns about participating in the encryption market. After all, insurance is an important patron saint of all economies.

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