Today there is over $68 billion locked in decentralized finance protocols, but the current DeFi industry can be considered as somewhat of a double-edged sword; borderless, trustless, and permissionless DeFi protocols offer millions of people around the world access to financial tools that they may not have been able to access through traditional finance.
In what is still to be considered a nascent industry, this unsurprisingly carries with it inherent risk, and with a lack of regulated recourses, we have seen millions of dollars in user assets lost or stolen.
In 2020 over $120 million was stolen via hacks or exploits of DeFi platforms and this year has not seen the action slow down, with $22 million stolen from 3 DeFi platforms in just one weekend this May. From borrowing and lending to yield farming, users have more of their assets than ever before locked into some of the most popular DeFi platforms and, as interest in DeFi from institutional investors and TradFi (traditional finance) continues to grow, there must be frameworks put in place to protect platform participants from the various dangers associated with using DeFi protocols.
Thankfully, there are several exciting projects that have emerged in recent months that promise to add a much needed layer of security underneath the many innovative protocols that are changing the way we approach finance in 2021 and beyond. Decentralized insurance utilizes the power of blockchain technology and smart contracts to offer users cover against black swan events, wallet hacks, smart contract exploits and much more, and below are 4 promising companies pushing the envelope for decentralized insurance.
Beady-eyed hackers are constantly looking for ways to exploit, manipulate, and ultimately profit from shiny new DeFi platforms and protocols that have just hit the market. But it’s not only the new kids on the block that are susceptible to hacks; some of the most popular DeFi borrowing and lending protocols in the industry are also regularly targeted, with platforms such as Yearn suffering from sizeable losses due to attacks in recent months.
Protecting users against risks within DeFi is therefore becoming increasingly important and Nexus Mutual does just that, harnessing the Ethereum blockchain to decentralize the process of claiming against a policy with a “people-powered alternative to insurance”.
Unlike traditional insurance companies, Nexus Mutual is run by its members, leaning on the power of smart contracts to create a community-based business model that sees governance control the outcome of any one insurance claim.
By holding the native NXM token, users can purchase smart contract cover against “material loss of value resulting from “unintended uses” of smart contact code”. This includes exploits due to code vulnerability, but it must be noted that at this time it does not include exchange hacks, phishing attacks or the loss of personal keys through the fault of the user themselves.
You can learn more about Nexus Mutual by reading their whitepaper.
The Eminence exploit in 2020, which saw $15 million of user funds that were locked in a brand new protocol created by Yearn Finance Founder Andre Cronje stolen in a flash loan attack, highlighted the ever-present dangers that still exist when using new and sometimes unfinished DeFi protocols.
Battling these dangers and having launched privately in February earlier this year, Unslashed Finance tokenizes coverage for DeFi participants and introduces “money streaming” to enable users to pay as they go with the option to instantly cancel a policy and offload it if needed.
Insurance available through Unslashed Finance covers a variety of events including exchange and smart contract hacks, validator slashing, stablecoin pegs, and oracle failures. The team behind the project is dedicated towards building a DeFi insurance product that is easily accessible to individuals, developers, and institutions alike but that also rewards users for their participation with an average yield of 24%.
The London-based startup recently raised £1.5 million in a round that included investment from the likes of Kyber Founder Loi Luu and Argent Founder Itamar Lesuisse and current clients of Unslashed Finance include ParaSwap, Lido Finance, and Kyber Network.
As touched upon earlier in this article, there are varying degrees of risk that accompany participating in the nascent DeFi landscape and this is where decentralized insurance has shone in recent months, giving users an element of discourse in an otherwise unregulated space.
But what has become apparent is that the availability of cover and the affordability of premiums on DeFi insurance platforms is directly proportional to the number of participants the protocol has. If DeFi insurance protocols are to reach a wider market and continue to grow, they must be easily accessible, risk assessed and must also adequately reward the participants that are required to lock capital in order to underwrite decentralized insurance products.
iTrust Finance manages risk and simplifies the overall process of participating in DeFi protocols, offering users a simple to use platform that is backed up by a risk-assessed and managed set of DeFi strategies.
In an exciting move and while implementing a DAO (decentralized autonomous organization) structure, iTrust Finance is also teaming up with existing insurance projects in the DeFi space (the first having been the aforementioned Nexus Mutual), building extended cover capacity with them and enabling lower premiums, accelerating adoption as a “layer 2 for DeFi insurance protocols”.
iTrust will enable users of DeFi insurance protocols to maximise staking rewards by solving risks and bottlenecks still associated with current DeFi insurance products. Run by a team with extensive experience in the traditional finance industry and advised by individuals such as Alex Bertomeu-Gilles, Risk Manager for Aave, iTrust will soon be announcing the platform and date set for their upcoming IDO.
Discover more about iTrust Finance’s novel DeFi insurance solutions here.
With decentralized finance making waves in every corner of the world, more eyes are on the future of finance than ever before. But with every innovative new protocol that is released, there are bad actors looking to exploit them and drain them of user assets.
Decentralized insurance can mitigate the risks involved for users participating in these new and risky protocols. Cover Protocol is a peer-to-peer coverage market that protects users against hacks and bug exploits that lead to a loss of funds, but only after thorough checks and measures are made to determine the risk level of the particular protocol fit the bill for coverage.
Should a user wish to claim in the event of loss of funds and after paying a fee for claiming against their insurance product (this fee increases each time a claim is made against a product to fight against spamming and malicious actors), the user’s claim is put forward by users first going through a community voting phase. Token holders vote on the validity of the claim and, if approved, the claim will then be handed to the protocol’s “Claim Validity Committee” which is made up of several reputable groups and individuals including blockchain cybersecurity firm Hacken and DeFi security analyst Julien Bouteloup.
Cover Protocol is also advised by Sam Bankman-Fried, Founder and CEO of FTX exchange, as well as Yearn Finance Founder Andre Cronje and several other notable names in the industry.
To discover more about the claim process and how Cover Protocol works, take a look at their Medium page.
With the yields from traditional savings accounts and such paling in comparison to those offered by DeFi protocols, it comes as no surprise that both retail investors and institutions are showing an increasing interest in DeFi products and the potential rewards available from yield farming, decentralized lending, borrowing, and liquidity providing. These four projects are at the forefront of the battle against unforeseen events in an ever-evolving industry, offering products that work towards stabilizing a sometimes erratic investment landscape and opening the doors for wider adoption of decentralized finance.
Do you use DeFi insurance? What are your favourite products currently? I'd love to hear your thoughts on Twitter! Drop me a comment.