With over $2 billion lost to decentralized finance this year, crypto insurance providers have huge market opportunities, according to one executive.
Although on-chain insurance has been around since 2017, only 1% of all crypto investments are actually covered by insurance, meaning the industry remains a “sleeping giant,” according to one crypto insurance executive.
Speaking to Cointelegraph, Dan Thomson, director of marketing for decentralized coverage protocol InsurAce, said there is a huge mismatch between the total value locked (TVL) in cryptocurrency and decentralized finance (DeFi) protocols and the percentage of that TVL with insurance coverage. :
“DeFi insurance is a sleeping giant. With less than 1% of all cryptos and less than 3% covered by DeFi, there is still a huge market opportunity to be realized.”
Despite investments in smart contract security auditing, online verification is a viable solution for protecting digital assets, for example, in the event of a smart contract being compromised or a Web3 protocol frontend being compromised.
The collapse of Terra (LUNA) — now renamed Terra Classic (LUNC) — and the subsequent shutdown of Terra USD is a textbook example of how on-chain insurance can protect investors, notes Thompson, adding that InsurAce “$11.7 million paid out to 155 victims victims of the ESN.
“Hacks in 2021 in DeFi alone resulted in $2.6 billion in losses,” which equates to $10 billion in the wider crypto space, and “we’re well beyond that in 2022,” Thomson added, highlighting the need for on-chain . insurance of digital assets.
Discussing whether traditional insurance companies could potentially offer cryptocurrency-focused products, Thomson said that while it has generated interest from traditional companies, they have not yet entered the space “because of their own rules and compliance,” adding:
“I don’t think the larger traditional insurers will develop their own applications for space, preferring to offer some kind of reinsurance to showcase themselves.”
Thomson said online insurance protocols have also suffered some setbacks, while noting that bandwidth has stifled the growth of online insurance protocols:
“Capacity is limited by underwriting, [which] is traditionally done with reinsurance, but in DeFi this is done by players and is therefore limited by TVL, [making it difficult] to create sufficient liquidity for most protocols.”
The problem is exacerbated by the fact that online insurance providers struggle to offer lenders an attractive return on investment, which in turn hinders the provision of liquidity, he said.
Thomson said his firm is now trying to address this capital efficiency issue by using reinsurance from traditional insurers as a way to “drive growth in a bear market,” adding:
“To address this issue, we will be one of the first protocols able to access traditional reinsurance to complement our existing pegged asset underwriting.”
Some cryptocurrency exchanges currently offer insurance services, but very few cryptocurrency protocols specialize in online insurance.
Related: Growing Need for Cryptocurrency Insurance
Online insurance services vary from protocol to protocol, but most protocols require users to provide the address of the smart contract they wish to receive coverage for, as well as the amount, currency, and time period in order to create an offer.
Many protocols then use a decentralized autonomous organization (DAO) and a token to allow token holders to vote on the validity of claims.
Other leading on-chain insurance protocols include Nexus Mutual and inSure DeFi.