The Intelligent Insurer #42 — Restrictions highlight risks of DeFi projects
ParaSwap, a DEX aggregator, recently made headlines recently for all of the wrong reasons. ParaSwap brought a relatively defunct feature back into the aggregator, enraging the majority of its user base.
Airdrops, a once popular DeFi platform feature, are rarely used these days for security reasons. In addition to security concerns, ParaSwap’s implementation of airdrops showed how these events can be unfavorable to many users.
In the latest Intelligent Insurer, we highlight the details of ParaSwap’s recent airdrop. We show how the event was extremely unfavorable to some of ParaSwap’s user base. However, we’ll first highlight the progress we’ve made via our software development update.
Insured Finance software development update
Development of our next-generation digital asset insurance platform continues unabated. This past week, we began regression testing efforts following the release of major security updates to our latest release. In addition, we also made progress as illustrated by the following points.
- Our security updates strengthened functionality around our proxy contract patterns and price feed from CoinGecko.
- We completed the first iteration of our new landing page and token faucet development.
- We are preparing to release our platform’s beta version with the updated landing page and relevant functionality.
User security and experience are at the forefront of our minds at all times. To this end, we continue testing our platform for bugs and apply updates to fix functionality issues. We’re positive that our efforts will provide our users with a seamless experience as they seek new age insurance products for their digital assets.
ParaSwap restricts rewards in security bid
DeFi platforms have always sought to reward early adopters. Airdrops, where early adopters receive an influx of coins, were a popular method that have recently been abandoned due to potential security concerns. However, they’ve recently been back in vogue as many crypto traders and investors seek rewards for their commitment.
However, the security issues associated with airdrops became extremely salient as ParaSwap implemented such offerings. In an bid to prevent so-called Sybil attacks, where one account can use multiple fake addresses to interact with ParaSwap and claim larger than normal airdrops, the platform went overboard with restricting qualification criteria. The platform categorized its users into three tiers, with the lowest tier receiving 5,200 PSP tokens, the middle tier receiving 7,800 PSP tokens ,and the highest tier receiving 10,400 PSP tokens.
While the token rewards are high, many early adopters were attracted by the huge staking rewards ParaSwap offers. Users currently can stake their PSP tokens and receive 543% annually. Needless to say, excitement was huge. However, ParaSwap also created extremely restrictive qualification criteria.
Of the 1.3 million accounts that were active on the protocol, only 20,000 were deemed eligible for the reward. Many early adopters were restricted from the airdrop. Some claimed to have used as little as two wallets on the platform but were left ineligible nonetheless. Some members of ParaSwap’s community expressed their disappointment over these events.
Lack of asset safety prompts restrictive measures
These events highlight some of the unique risks the DeFi is causing investors. While ParaSwap’s actions were carried out in good faith, the platform nonetheless left the majority of its devoted users without compensation for their belief in the platform. Tight rules and protocols like the ones created in this incident end up harming genuine users due to the heightened security risks.
The DeFi industry has experienced multiple cases of heists and security breaches, some repeatedly affecting the same platform. These incidents have left investors fearful of asset security and have resulted in developers creating even more stringent processes to weed out potentially bad actors.
This has left DeFi protocol investors subject to the whims of the platform’s developers. In essence, they’re placing bets on a decentralized system that is run by a centralized committee. This goes against DeFI’s core philosophy of promoting inclusiveness and increasing participation at all levels of society.
A lack of confidence in protocol security lies at the heart of this issue. If developers were certain of their protocols’ security, they wouldn’t need to resort to restrictive reward mechanisms. For their part, users would invest more money and adopt DeFi platforms in greater numbers if asset security was guaranteed. Technology doesn’t allow for such confidence at this point, unfortunately.
One solution to these problems is digital asset insurance solutions like the ones found on Insured Finance. These contracts can be used to protect digital assets against exchange hacks, rug pulls, stablecoin failures, and other kinds of risks in the DeFi industry. As insurance solutions become more widespread, platform developers will likely let go of the need for restrictive solutions like the ones deployed by ParaSwap and return to the decentralized ethos that attracts investors to DeFi in the first place. Users can also gain confidence from knowing their assets are covered at all times, from all possible risks.
About Insured Finance
Insured Finance is a decentralized, peer-to-peer insurance marketplace. Users can request customized insurance on a wide variety of digital assets, thereby ensuring full protection. Those fulfilling requests can earn premiums and earn a competitive return on their capital. Claims are fully collateralized and settled instantly.