DeFi Insurance
What is DeFi Insurance
DeFi insurance is a financial product that provides protection against risks such as smart contract hacks and depegging. Similar to traditional insurance, but operated in a decentralized manner.
Core concepts:
- Cover: The insurance product
- Premium: The insurance fee
- Claim: Insurance claim request
- Assessment: Determining claim validity
Why DeFi Insurance is Needed
The Reality of DeFi Risks
| Year | Hack Losses |
|---|---|
| 2020 | ~$200M |
| 2021 | ~$1.3B |
| 2022 | ~$3.8B |
| 2023 | ~$1.7B |
Limitations of Individual Response:
- Cannot audit every protocol
- Technical verification is difficult
- Diversification alone cannot provide complete protection
The Role of Insurance
- Risk Transfer: From individual to insurance pool
- Loss Recovery: Compensation in case of hacks
- Peace of Mind: Enables more active participation
Major DeFi Insurance Protocols
Nexus Mutual
Overview:
- Largest DeFi insurance
- Established in 2019
- Mutual insurance structure
Features:
- Operated with NXM token
- KYC required
- Community-based assessment
Cover Types:
- Protocol Cover: Specific protocol hacks
- Custody Cover: Centralized exchange bankruptcy
- ETH Slashing Cover: Validator slashing
Premium:
- 2~10% annually (varies by protocol)
- Fluctuates based on supply/demand
InsurAce
Overview:
- Multi-chain insurance
- No KYC required
- Portfolio cover available
Features:
- INSUR token
- Multiple chain support
- Bundle products
Cover Types:
- Smart Contract Cover
- Stablecoin Depegging Cover
- Bridge Cover
- CEX Cover
Premium:
- 1~5% annually (relatively affordable)
Unslashed Finance
Overview:
- Various cover types
- Focus on capital efficiency
Cover Types:
- Oracle Failure
- Validator Slashing
- Bridge Hacks
Risk Harbor
Overview:
- Automated claim assessment
- Smart contract-based payouts
Features:
- Parametric insurance (automatic payout when conditions are met)
- Minimized subjective assessment
Comparison Table
| Protocol | KYC | Chains | Premium | Assessment |
|---|---|---|---|---|
| Nexus Mutual | Required | Ethereum | 2~10% | Community |
| InsurAce | Not required | Multi-chain | 1~5% | Community |
| Unslashed | Not required | Ethereum | 2~8% | Committee |
| Risk Harbor | Not required | Multi-chain | Variable | Automated |
Coverage Scope
Covered Risks
Smart Contract Hacks:
- Loss of funds due to code bugs
- Reentrancy attacks, etc.
Protocol Failures:
- Economic attacks
- Governance attacks
Depegging:
- Stablecoin price deviation
- Usually triggered when deviation exceeds 10~20%
Custody Failures:
- Exchange bankruptcy/hacks
- Wallet service failures
Risks Not Covered
Common Exclusions:
- Token price fluctuations
- Impermanent loss
- Rug pulls (some excluded)
- Frontend phishing (some)
- Private key loss/theft
Must Read:
- Exact terms of each cover
- List of exclusions
- Payout conditions
Cover Purchase Process
1. Select Protocol
Choose the DeFi protocol you want insured.
Considerations:
- Protocols you're using
- Amount of risk exposure
- Cover availability
2. Determine Cover Amount
Set the amount to be covered.
Recommended:
- 100% of actual exposure
- Or partial cover (to save costs)
3. Select Duration
Options:
- 30 days
- 90 days
- 180 days
- 365 days
Longer terms typically have lower premium rates.
4. Check Premium
Annual Premium Example:
- $10,000 cover x 5% = $500/year
- Short-term: Calculated proportionally
5. Purchase
After transaction approval, receive cover proof as NFT or token.
Claims Process
1. Incident Occurs
An incident such as a hack occurs on a covered protocol.
2. Submit Claim
Required Information:
- Cover proof
- Evidence of loss (transactions, etc.)
- Detailed incident description
3. Assessment
Nexus Mutual:
- Community vote (NXM holders)
- Payout upon majority approval
InsurAce:
- Claims committee review
- Advisory Board final decision
Risk Harbor:
- Automated condition verification
- Immediate payout when conditions are met
4. Payout
Upon approval, cover amount is paid (usually in stablecoins).
Assessment Duration
- Generally 1~4 weeks
- Complex cases take longer
- Parametric insurance is immediate
Premium Determinants
1. Protocol Risk
- Audit status
- TVL size
- Operating history
- Past incident history
2. Cover Demand
- High demand = higher premium
- Cover capacity limits
3. Duration
- Long-term cover: Lower annual rate
- Short-term cover: Higher annual rate
4. Market Conditions
- Premium rises when hacks are frequent
- Premium falls during stable periods
Limitations of Insurance
1. Capacity Limits
Problem:
- Insurance capacity insufficient compared to total DeFi TVL
- Popular protocol covers sell out
Reality:
- DeFi TVL: ~$50B+
- Available insurance capacity: ~$1B
2. Claim Rejection Risk
Causes:
- Differences in terms interpretation
- Falling under exclusions
- Insufficient evidence
Cases:
- Controversies over rejected Nexus Mutual claims
3. Premium Costs
Calculation:
- 5% annual premium
- 10% farming APY
- Net profit = 10% - 5% = 5%
Insurance premiums can take a significant portion of returns.
4. Insurer Risk
Problem:
- Insurance protocol itself could be hacked
- Fund pool could be depleted
Mitigation:
- Use verified insurance protocols
- Diversify across multiple insurers
5. Limited Coverage Scope
Reality:
- Cannot cover all risks
- IL, price fluctuations excluded
- New protocols unsupported
Insurance Alternatives
1. Self-Insurance
Method:
- Hold portion of portfolio as "insurance fund"
- Self-cover in case of loss
Pros:
- No premium
- Flexible use
Cons:
- Insufficient for large losses
- Opportunity cost
2. Diversification
Method:
- Spread across multiple protocols
- Spread across multiple chains
Limitations:
- Correlated risks
- Systemic risks
3. Conservative Strategy
Method:
- Only verified protocols
- Simple strategies
- Low leverage
Insurance Checklist
Before Purchase
- Review cover terms in detail
- Understand exclusions
- Calculate profit vs premium
- Understand claims process
- Verify insurance protocol itself
At Purchase
- Appropriate cover amount
- Appropriate duration
- Store cover proof
Maintenance
- Remember expiration date
- Follow protocol news
- File claims promptly when incidents occur
When to Consider Insurance
Insurance Recommended
- Managing large amounts
- Leveraged positions
- Using new/risky protocols
- Risk-averse disposition
Insurance Not Necessary
- Small investments
- Using only verified protocols
- Sufficient diversification
- Premium excessive relative to returns
Summary
DeFi insurance is a product that provides protection against risks like smart contract hacks and depegging, with Nexus Mutual and InsurAce being representative examples. Smart contract bugs, protocol failures, and depegging are covered, but token price fluctuations and impermanent loss are excluded. Premiums are typically 1~10% annually, and claims go through community or committee assessment. Insurance capacity is limited, claim rejection risk exists, and there's also risk from the insurance protocol itself. Worth considering for large amounts or high-risk protocol usage, but diversification and conservative strategies should be the foundation.
Concluding the DeFi Series
Through this series, we've explored DeFi from basics to advanced concepts:
- Basics: What is DeFi, wallets, smart contracts, ecosystem
- DEX: AMM, liquidity provision, impermanent loss
- Lending: Loans, collateral, liquidation, flash loans, leverage
- Stablecoins: Types, risks, CDP
- Staking: PoS, liquid staking, yields
- Yield Farming: Farming, real yield, aggregators
- Cross-chain: Bridges, bridge risks
- Governance: DAO, governance attacks
- Security: Risk overview, smart contract security, insurance
DeFi is a space where opportunities and risks coexist. Chasing high APY without sufficient understanding can lead to significant losses. DYOR (Do Your Own Research), diversification, and conservative approaches are the most important principles for long-term success.