While chain insurance has been around since 2017only a paltry 1% of all crypto investments are actually covered by insurance, meaning the industry remains a “sleeping giant,” according to a crypto insurance executive.
In an interview with Cointelegraph, Dan Thomson, CMO for decentralized coverage protocol InsurAce, said that there is a huge disparity between the total value locked (TVL) in crypto and decentralized finance (DeFi) protocols and the percentage of that TVL with insurance coverage:
“DeFi insurance is a sleeping giant. With less than 1% coverage of all cryptocurrencies and less than 3% DeFi, there is a huge market opportunity that still needs to be realized.”
Although much investment has been invested in smart contract security audits, on-chain insurance serves as a viable solution for protecting digital assets — such as when a smart contract is exploited or a Web3 protocol frontend is compromised.
The collapse of Terra (LUNA) and the resulting depeg of Terra USD provides a a textbook example of how on-chain insurance can protect investorsnotes Thompson, adding that InsurAce “paid out $11.7 million to 155 affected UST victims.”
“Hacks accounted for $2.6 billion in losses in DeFi alone in 2021,” bringing the broader crypto space to $10 billion, and “we’re already a long way off in 2022,” Thomson added, stressing the need for on-chain insurance for digital assets.
Discussing whether traditional insurance companies may eventually offer cryptocurrency-focused products, Thomson said that while there has been interest from traditional firms, they have yet to move into this space “because of their own regulations and compliance,” adding:
“I don’t believe the larger traditional insurance companies will develop their own native applications for this space, but will prefer to offer a type of reinsurance as a way to gain exposure.”
Thomson said that chain-insurance protocols have also suffered some setbacks, but noted that capacity has stalled the growth of chain-insurance protocols:
“Capacities are limited by subscription [which is] something that is traditionally done with collateral, but in DeFi it is done by stakers and therefore limited by TVL [which makes it] it’s hard for most protocols to build enough liquidity.”
This problem is compounded by the fact that on-chain insurance providers have difficulty offering capital providers attractive investment returns, which discourages the provision of liquidity, he said.
Thomson said his firm is now looking to address this capital efficiency issue by leveraging reinsurance from traditional insurers as a means to “turbo-charge growth through a bear market,” adding:
“To remedy this, we will be one of the first protocols to be able to bridge back to access traditional collateral to complement our existing underwriting from embedded assets.”
Some cryptocurrency exchanges currently provide insurance services, but very few crypto-native protocols specialize in on-chain insurance.
On-chain insurance services vary from protocol to protocol, but most protocols require users to specify the address of the smart contract they want coverage for, along with the amount, currency, and time period in order to generate a quote.
Many protocols then use a decentralized autonomous organization (DAO) and a token that allows token holders to vote on the validity of claims.
Other top on-chain insurance protocols include Nexus Mutual and inSure DeFi.