With the loss of more than $2 billion in decentralized finance this year, there is a huge market opportunity for crypto insurance providers, according to an 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, marketing director for decentralized coverage protocol InsurAce, said that there is a large discrepancy 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 cryptocurrencies and less than 3% DeFi, huge market opportunities have yet to be realized.”
While investing in smart contract security testing, on-chain insurance is a viable solution to protect digital assets – for example, if a smart contract is exploited or the Web3 protocol front-end is compromised.
The collapse of Terra (LUNA) – after being rebranded as Terra Classic (LUNC) – and the resulting loss of Terra USD represents a textbook example of how on-chain insurance can protect investors, Thompson notes, adding that InsurAce “$11.7 million paid out to 155 affected victims of UST.”
“Hacks in 2021 in DeFi alone resulted in $2.6 billion in losses,” which equates to $10 billion in the broader crypto space, and “we already surpassed that in 2022,” Thomson added and stressed the need for on-chain insurance for digital assets.
Discussing whether traditional insurance companies might eventually offer crypto-focused products, Thomson said that while this has sparked interest from traditional companies, they have not yet ventured into the space “due to their own regulations and compliance,” adding:
“I don’t think larger traditional insurance companies will develop their own applications for space, but would offer some sort of reassurance rather than access to information.”
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 stakeholders and is therefore limited by TVL, making it difficult for most protocols to generate sufficient liquidity.”
The problem is compounded by the fact that online insurance providers struggle to offer attractive investment returns to lenders, which in turn impedes the provision of liquidity, he said.
Thomson said his firm is currently trying to address this capital efficiency issue by using reinsurance from traditional insurers as a way to “spur growth in a bear market,” adding:
“To address this, we will be one of the first protocols to be able to restore access to traditional reinsurance to complement our existing betting assets underwriting.”
Some cryptocurrency exchanges currently offer insurance services, but very few cryptocurrency protocols specialize in online insurance.
See also: 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 for which they want insurance coverage, as well as the amount, currency, and time period in order to create a quote.
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 online insurance protocols are Nexus Mutual and inSure DeFi.