There is a lot to take away from the price performance of the digital asset market in 2020. One of such is that the concept of bitcoin halving, as expected, is a major contributing factor to the success of the bitcoin market and has eventually delivered the level of price swings projected during the pre-halving days. Another is that DeFi is perhaps the most potent application of cryptocurrency technology, which makes it the most plausible instigator of the next wave of growth. In the months following the global market crash, the DeFi landscape has attracted around $14 billion worth of capital. Why is this so?
Much of this growth hinges on the yield generating potential of DeFi projects and the open and fair model of the protocols. The sheer possibility of earning mouthwatering returns as against the near-zero returns applicable to traditional alternatives continues to attract investors in their numbers. What we have is a fast-growing landscape that eclipses the restrictive financial fundamentals prevalent in the centralized economic terrain. However, with this high probability of impressive yields comes an untold level of risks. This threat is exemplified by the Yam.Finance scandal that saw the price of YAM token plunge from $200 to $0.9 under 24 hours back in August.
Despite the volatile landscape of DeFI, just a minuscule of the total assets locked in the DeFI is insured. While several things could go wrong when engaging with DeFi applications, only a handful of DeFi investors are mindful enough to take extra precautions. One of the reasons for this is the nascent state of the market. Not until recently, developers focused majorly on the yield performance of DeFi protocols and not the protection of users. However, following a series of hacks and scams, stakeholders have begun to pay more attention to the risk management component of DeFi.
According to Ether Insure, one of the proponents of a secure DeFi landscape, “distributed technology was built for distributed risk.” Hence, it is crucial to set up compatible consumer protection infrastructures that will negate the risks associated with DeFi. On its part, the startup has introduced improved smart contract failure cover, among other insurance implementations, to ensure that investors and market participants are shielded from unforeseen flaws in the systems of DeFi applications.
In light of Ether Insure’s breakthrough in this regard, I decided to interview Allan Henderson, who is the co-founder of Ether Insure and a former manager at Lloyds insurance. In this interview, Henderson discussed the current flaw in DeFi and explained how he thinks DeFi will exponentially grow in 2021. Below are excerpts from the interview.
Andrey Sergeenkov: DeFi has experienced rapid growth this year, but you mentioned there is a fundamental flaw, what is this flaw?
Allan Henderson: The ecosystem isn’t complete. Most of the focus and effort to date has been on DeFi projects that produce high and in most cases unsustainable yield. All applications are shooting for sky highs but no one is wearing a parachute, partly due to the lack of solutions that offer downside protection.
Andrey Sergeenkov: So what exactly do you think is the missing piece of the DeFi ecosystem?
Allan Henderson: Insurance. Specifically, insurance built for Decentralized Finance, because distributed technology needs a distributed risk solution.
For example; in traditional finance currently over 5,000 insurance and reinsurance companies operate in Europe. A well established insurance industry provides economies with a reliable mechanism for pooling and transferring risk and in so doing enables greater levels of economic activity. This breeds consumer confidence and hence growth of the entire ecosystem.
Andrey Sergeenkov: Why do you believe DeFi insurance will cause the entire DeFi sector to boom? And why in 2021?
Allan Henderson: For the space to truly explode, a wave of fresh funds would need to enter. Up to now most of the growth has been fueled by existing crypto asset holders dabbling in DeFi. Despite the significant yields available in DeFi, many institutional and mainstream retail investors are hesitant to enter, due to the key risk factors associated with DeFi.
Imagine if DeFi insurance was as prominent and easy to use. Imagine if you, other mainstream investors and even institutional players can insure your investment in DeFi projects that offer much higher yields than traditional finance. What would happen?
Greater consumer confidence, which would lead to a larger influx of cash and hence growth in the space. Insurance isn’t sexy, but it’s what is needed for the space to grow. We believe that decentralized insurance will also be a keystone for the internet of trust and trustless networks.
This year, luckily a handful of other projects including ours is laser focused on this space. With solutions entering the market by December and focusing on adoption and traction throughout 2021.
Andrey Sergeenkov: Why is ether.insure different?
Allan Henderson: As less than 1% of DeFi TLV is insured, It's not about being different, the DeFi insurance space is new and not yet saturated. It's about product market fit.
Our goal is to empower DeFi participants so that greater consumer confidence can be given across the entire DeFi space. How we plan on doing this is by establishing a DeFi specific marketplace to easily obtain and trade insurance risk. Done through a collection of pools and tools to navigate between different insurance pools that offer varying coverage and premiums for DeFi projects.
Prudently however, to reach this goal Ether Insure will not be launching a full marketplace from the beginning. More practically to reach this goal Ether.Insure will launch with two key product sets which will ultimately form the basis of a future marketplace; Smart Contract Failure Cover and Custom Pools.
Where Smart contract failure covers more mature DeFi projects which users can instantly buy cover for. On the flip side offering liquidity providers more predictable yield.
For Custom Pools, we will allow cohorts of people e.g. participants in a new project, to establish an insurance market for that project. This product offers agility which can keep up with new product launches and the growth and experimentation of the industry.
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