The Intelligent Insurer #10 — How DeFi investors can cover themselves against unnecessary risks
Since the second quarter of 2020, we have seen an explosion in the value of decentralized finance (DeFi) projects. There has been a significant capital inflow into the DeFi market, resulting in expanding trading volume and market capitalization. In less than one year, the Total Value Locked (TVL) in DeFi protocols has moved from below $1 billion to $45 billion.
While the DeFi ecosystem continues to explode in terms of awareness, adoption, and experimentation, investors must remain aware that DeFi is still a nascent industry. As a result, there will be bug fixes, protocol adjustments, and even exploitations that could expose investors to unnecessary risks. In the latest Intelligent Insurer, we will explain how investors can safeguard against the imposed risks of participating in the DeFi ecosystem.
Risk Exposure Explodes with Expanding DeFi Market
The figure below shows the astronomical rise of DeFi TVL in 2021. With a multitude of solutions springing up in the ecosystem, further growth in TVL throughout 2021 is widely anticipated.
Most DeFi projects thrive on staking and liquidity, making incentivizing liquidity providers an imperative for emerging DeFi apps. However, this also exposes the locked liquidity to risks. In 2020 alone, millions of dollars were lost to hacks, exploits, and liquidations. These are also some problems inherent to the Ethereum blockchain where the majority of the DeFi ecosystem resides.
Ethereum 2.0 was launched in December 2020, but the full mainnet is being upgraded in phases. The main reason for the upgrade is to resolve the scalability issues on the Ethereum blockchain. Given that the mainnet upgrade will take years to complete, the threat of congestion among DeFi solutions remains. This problem is already rearing its head with the skyrocketing gas fees and failed transactions. Some DeFi applications could even stop functioning altogether.
The vulnerability of DeFi in its current stage was exposed in 2020 with at least fifteen different hacks occurring across various protocols. The total amount stolen during this period was over $120 million. Lendf.me’s $25 million attack stands out as one of the major protocol exploits during this period. The series of hacks and other challenges surrounding DeFi protocols necessitated the introduction of safety nets that would protect investors.
Insurance for DeFi Investors
Insurance protocols like Nexus Mutual, CDx, and Etherisc are gaining popularity because of the problem they address in this emerging ecosystem. As an investor, being assured of the safety of your investment is extremely valuable, especially in a highly uncertain ecosystem like DeFi. Nexus Mutual uses a risk-sharing pool that is governed by its members whose rights are represented by the NXM token. Etherisc is building a platform for decentralized insurance applications, while CDx is a platform for tokenized tradable insurance swaps.
Several other solutions are emerging with unique and innovative designs. Insured Finance is designed to be unique and tailored for individual users through a peer-to-peer marketplace. In a decentralized and unpredictable environment like the current DeFi ecosystem, streamlined protection may not be sufficient. For customized coverage, a P2P marketplace is necessary to address the eclectic risks that investors are exposed to in burgeoning spaces like DeFi.
Unlike other existing solutions, Insured Finance does not restrict coverage to particular risks. It is a solution that is built with the mainstream digital asset holder in mind. With Insured Finance, the power and extent of coverage resides with the user who can request coverage tailored to their unique needs.
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.