Analyzing Digital Asset Insurance Options
The Intelligent Insurer #2 — Reviewing Digital Asset Insurance Options
Ethereum-Based Incumbents
The lion’s shares of incumbent insurance solutions operate on the Ethereum network. Ethereum has been subject to extremely high gas fees during the year. In times of high fees, users are deterred from carrying out transactions which are not urgent. Transactions regarding insurance solutions, NFTs, and many DApps are often postponed. Average daily Ethereum fees have recently spiked to yearly highs after significant appreciation in the price of ETH. Average daily fees has surpassed $17.
Nexus Mutual — Smart Contract Cover Through A Liquidity Pool
Nexus Mutual is the most popular digital asset insurance option. Nexus Mutual relies on users locking capital into a liquidity pool. Users can secure smart contract coverage by interacting with the pool. The pool is governed by holders of the Nexus Mutual token (NXM). Nexus has ambitions to expand its offerings beyond smart contracts but its current offerings remain tightly restricted. Exchange hacks, stablecoin failure, and “rug pulls” remain outside the boundaries of the Nexus Mutual coverage.
While Nexus Mutual gained popularity in the second half of 2020, the amount of ETH locked in the pool has been declining in recent months. Popularity has waned as users realized that possible coverage is limited. Payouts are not based on personal loss and depend on how much value is staked and available to pay the claims. Pool members — NXM holders — bet on the validity claims through a complex governance process.
CDx — Diverse Coverage Via Credit Default Swaps
CDx is another digital asset insurance solution that facilitates coverage in a different manner. While Nexus Mutual uses a liquidity pool to enable users to secure insurance, CDx provides tokenized and tradeable credit default swaps.
Credit default swaps are derivative contracts that provide the owner with a stream of insurance payments. If the insured event occurs, collateralization in a smart contract covers the credit default swap seller. This collateralization is provided by the purchaser of the contract who was seeking to secure the stream of insurance payments.
A market for credit default swaps opens up interesting possibilities. Exchange hacks and even traditional events like flight delays can be covered. However, the design underpinning CDx remains rudimentary and the high fees associated with the Ethereum blockchain make frequent trading unfeasible.
Other Digital Asset Insurance Options
There are several other Ethereum-based digital asset insurance options. Prediction market Augur and financial derivatives platform Opyn both provide insurance options. However, the coverage possibilities for extreme types of risks are poor on both of these platforms. Etherisc is another option. Functioning through a liquidity pool, Etherisc allows users to create their own insurance products.
Emerging Insurance Solutions
There is a pressing need for better insurance options in the digital asset industry. Emerging solutions have been basing their platforms on the Polkadot network. Polkadot offers a low-fee alternative that is favorable to users adopting insurance for their digital assets. The leading teams launching digital asset insurance solutions on Polkadot are Bridge Mutual and Insured Finance.
About Insured Finance
Insured Finance is a decentralized, peer-to-peer insurance marketplace. Built on the Polkadot blockchain, Insured Finance users can request customized insurance on a wide variety of digital assets. Those that fulfill requests earn premiums and can earn a competitive return on their capital. Claims are fully collateralized and settled instantly.
