Decentralized financing contains many of the characteristics of previously emerging cryptocurrency markets: incredible profits, extreme volatility and enormous risks. In a new report, ShapeShift, a leader in cryptocurrency exchange, outlines the four biggest risks DeFi investors face and why the new decentralized insurance field can offer a solution.
The report, entitled Risk Deployment: Decentralized Insurance, categorizes DeFi risk into the following mines: confiscation risk, smart contract risk, protocol risk and Oracle risk.
The author of the report, Kent Barton, claims that the history of cryptography is full of examples of centralized risk-sharing of smart contracts to “lose or flee users’ money.” Just look at the DAO event in 2016, which involved 3.6 million Ether (ETH). exhausted.
The most important risks have not yet been identified at protocol level, but this can change rapidly as the market continues to develop. Oracle risk falls into the same category, but is difficult to define or predict. However, Parton reminds readers that the so-called DeFi Summer 2020 was full of cases where “express loans were used to artificially manipulate” Oracle’s price streams.
The report says that decentralized insurance protocols that give cryptocurrency users a way to reduce the negative impact address these issues. Burton explains:
“The decentralized aspect of DeFi means that many of the risk-reducing functions inherent in traditional financial lines are lacking. However, the DeFi community saves by creating a decentralized solution. This is a new area that needs to be addressed. ”
These two protocols, Nexus Mutual and Cover Protocol, have been recognized as pioneers in decentralized insurance. None of the companies are affiliated with ShapeShift.
Nexus Mutual has become the largest player in the decentralized insurance industry, whose total value has grown nineteen times and reached $ 200 million in the last year alone. The Nexus model is about creating a pool of funds that can be used to handle errors and smart contract requirements. The Nexus ecosystem consists of three actors: risk assessors, requirements evaluators and decision makers, with the original NXM token as a common denominator for all participants.
Cover Protocol, the peer-to-peer insurance market, is one of the newest players in the industry, launched in November 2020. The platform allows users to purchase insurance coverage for almost everything except the Code of Corporate Governance – in this case COVER – not used for drawing. … Unlike Nexus, Cover issues separate CLAIM ERC-20 codes for each application and the expiration date of the coverage. As Barton points out, a decentralized exchange can make it easier to trade these ERC-20 tokens with other insurance projects.
Ironically, both protocols have been targeted by hackers in recent times. In December 2020, Cover Protocol came under endless mine attack, which led to the token price falling 97%. In the same month, Nexus Mutual founder Hugh Karp lost $ 8 million after an attacker installed a hacked version of the popular MetaMask wallet on his mobile device.
DeFi has been an incredible blessing for early adopters to hit the market over the last twelve months. The DeFi sector has been one of the most successful cryptocurrency histories in terms of adoption, return and total value limited to different ecosystems. The total cost of mega projects is $ 100 billion dollars, which is almost 20% less than last week’s peak. The total cost of the shutdown exceeded $ 123 billion on April 16, according to industry data.
Regarding ShapeShift, the organization has expanded its research in recent months after recently publishing the report on betting derivatives. The exchange also made headlines last week after merging the chain exchange via ThorCHAIN. Mobile users can now trade Bitcoin (BTC) directly with Ether and Litecoin (LTC) without using a trusted person, counterparty or intermediary.