The current status and future potential of the DeFi insurance market


The insurance industry is a huge market. In 2019, the total global insurance premiums amounted to 6.3 trillion US dollars. The world is complicated, and we always have the risk of some kind of accident. The following is a simple risk management framework that illustrates the measures we should take to deal with different types of risks.

Individuals should transfer high-impact but low-frequency risks (such as natural disasters and cancer), and deal with this type of risk through insurance.

The operation of insurance is based on two main assumptions:

One is the law of large numbers. The loss events covered by insurance must be of small frequency. If the frequency of events is high enough, the result will tend to the expected value.

The second is the risk sharing mechanism . Loss events have the characteristics of low frequency and large impact, so the insurance premium paid by a large number of people subsidizes the loss of a small number of large claims.

Essentially, insurance is a tool for pooling capital and socializing huge losses so that participants will not go bankrupt in a catastrophic event.

Insurance socializes the cost of experiencing catastrophic events so that individuals can take risks. It is a risk management tool that encourages more users to participate, and it is essential for the DeFi industry to go beyond the existing audience segments. The DeFi industry needs insurance products to persuade institutional participants with large amounts of capital to join.

However, DeFi insurance is currently at the stage of no supervisor, no supervision, no standards, and no regulations.

The opportunity is huge, the risk still exists

“DeFi insurance has many advantages over traditional financial insurance. For example, DeFi insurance is highly innovative in terms of improving privacy, fairness, asset security, reducing financial costs, and de-trusting.

However, at present, Defi insurance is mainly concentrated in the crypto asset industry. If blockchain technology can be better coupled with the traditional financial industry, with the help of Defi insurance to solve the problems in the traditional insurance industry, its potential and effectiveness are very huge. “

The financial nature of blockchain technology has always been one of the most concerned topics. The enthusiasm of DeFi-related industries has once again confirmed this. The audit, settlement, mortgage and other aspects of traditional financial services can all improve security and operational efficiency in decentralized technology.

It may be one of the future trends that the credit system based on blockchain smart contracts penetrates the financial market and promotes its reform.

However, as a profit-oriented investment, DeFi insurance is different from common applications such as over-mortgage lending and spot transactions. It requires a more stable credit market and interest rate market. This is for the DeFi that has yet to be perfected in the real-name KYC and credit scoring fields. Ecologically speaking, it is a challenge.

Some experts believe that a key to the future development of DeFi insurance is whether the subject of DeFi insurance is out-of-chain risk or intra-chain risk.

When the subject of DeFi insurance is off-chain risk, DeFi insurance needs to solve two basic problems: one is that the off-chain risk is denominated in legal currency, but the insurance compensation uses Crypto assets in the chain, which causes currency mismatch problems; the second is for chain Insurance actuarial calculations and insurance loss determinations for external risks can only be performed outside the chain, so the relevant results need to be written into the chain through the oracle.

When the subject of DeFi insurance is intra-chain risk, the risk coverage needs to be expanded. In addition, although DeFi insurance actuarial calculation and insurance loss determination are technical issues, they require high professional capabilities and will significantly affect the way DeFi insurance is implemented.

“DeFi insurance is still in a very early stage of development, and its system construction and product innovation have just started. Outstanding projects in the blockchain industry have never lacked capital to follow.”

The current restrictions on the development of DeFi insurance are technical factors on the one hand, and policy factors on the other. The main technical factor is that the openness of the DeFi contract makes the agreement easy to be attacked by hackers; the main policy factor is that the current DeFi insurance is still mainly limited to the assets in the Crypto asset chain, and the combination of traditional financial assets also requires the dual support of policy and technology.

DEFI insurance set off a boom

With the continuous upgrade and iteration of the DeFi protocol, the DeFi insurance market is rapidly alternating and gradually taking shape in terms of code quality and business model, supporting the growth of DeFi lock-up volume. At the same time, the DeFi protocol was attacked and caused frequent incidents of property damage.

“Lightning loan attacks, arbitrage, protocol attacks, etc., are affecting the stability of the market and the security of market participants’ assets. The past year was also a year in which various security incidents were not uncommon. Origin Protocol lost value due to reentry attacks. 45 million yuan, and the loss of Balancer due to lightning loan attacks is 3 million yuan. In the face of endless smart contracts being attacked, the importance of insurance becomes even more prominent.

With the popularity of DeFi and the continuous participation of investors and speculators, market competition has become more and more fierce, and the test on projects and teams has become more severe.

“In the DeFi insurance ecological chain, DeFi projects actually account for a lot of weight. A good insurance platform will eventually gain the favor of most DeFi projects, to access and establish corresponding insurance policies, and even actively update some codes. Related (such as audit updates) information.

“For a project, if you want to stand out from the many Defi projects, it must first be sufficiently safe and innovative from a technical point of view , be able to differentiate from other projects and be able to solve the pain points of the industry; secondly, the ecological quality, diversity and activity Nature , high quality and rich ecology are the key factors for a virtuous cycle of any project.”

A forward-looking leader is also the key to whether a project can be at the forefront of the industry. An excellent technical development team is the support for achieving technical feasibility, while the financing and operation team is the blood of the long-term development of the project. “Only with the above qualities A team that is able to gain a firm foothold in the fierce competition.”

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