Decentralized finance (DeFi) is currently gaining momentum, and ShapeShift believes that the decentralized insurance sector will play a key role in its consolidation and future development.
The rest they have taken Bitcoin and NFT in the market currently, is causing investors to turn their gaze again to the ecosystems of the decentralized finance (Challenge). By shapeshift, a firm for the global trade of cryptocurrencies, and digital assets, each month the total value locked (TVL), or total liquidity, of decentralized finance protocols increases significantly. This as a result of growing interest and greater adoption and investment by users.
In its most recent report, titled "Spreading the Risk: Decentralized Insurance", the firm explains that the value opportunities that these spaces offer investors are attracting more and more users. However, despite offering many opportunities, DeFi ecosystems also represent high risks for those who bet and negotiate with their money in these spaces. Due to this reality, the firm believes that the insurance industry and coverage policies can play a fundamental role in its consolidation and future development of DeFi.
The ShapeShift report primarily focuses on products and services offering decentralized insurance protocols such as Nexus mutual y Cover Protocol, which seek to minimize investors' risks of losses when exposed to DeFi.
Kent Barton, head of research and development at ShapeShift and author of the report, notes that the growth and momentum that DeFi is currently taking is extremely positive for everyone. Decentralized finance ecosystems provide the opportunity for their users to obtain returns that surpass traditional financial avenues; However, the risk is also much higher. Therefore, Barton and the firm consider it prudent to analyze insurance vehicles as an emerging field within these ecosystems, which can significantly help limit negative risk exposure.
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$113.000 billion in total liquidity
The DeFi ecosystem has a total liquidity of more than 113.000 million, according to data from DeFi Llama. This value represents a growth of almost 540% so far this year. Total DeFi liquidity for January was close to $21.000 billion.
But, as liquidity has increased in decentralized finance ecosystems, the number of hacks and exploits to their protocols has also grown; that have ended in million-dollar losses and a high number of people affected. By the end of March, exploits and hacks to DeFi protocols totaled more than $ 100 billion in losses; which represents about 10% of the total liquidity that moves in these protocols currently, and the same sum in value losses in all the exploits that DeFi experienced during 2020. This is important data, considering that it is just beginning the second trimester.
The biggest risks of DeFi
In the report, Barton pointed out several examples of what can happen unexpectedly in DeFi, and which can leave a deep mark on its investors.
One of the best-known cases of hacks in DeFi, which caused great havoc in the personal finances of thousands of investors, is the case of The dao in 2016. This organization was the victim of a hack, which occurred through one of its smart contracts, in which he lost 3,6 million of the cryptocurrency Ethereum (ETH). By then, the theft meant the loss of $50 million from the project. However, to date, the 3,6 million ethers stolen from The DAO would be valued at more than $9.576 million.
Such was the magnitude of this hack that the Ethereum community was divided in two, between those who wanted to return the funds and those who wanted to continue with the network intact, despite the theft. The DAO hack gave rise to Ethereum Classic (ETC).
Likewise, DeFi vulnerabilities and exploits became popular since the second half of the year, with several dozen projects being victims of large thefts. One of the most common attacks within these ecosystems are the so-called “flash loan attacks”; which allow malicious actors to game or manipulate token prices to drain funds from a DeFi liquidity vault or smart contract.
Given this reality, Barton points out that “despite all the wonders of DeFi, it is not for the faint of heart”. The author of the ShapeShift report reminds investors that in the world of cryptocurrencies there are no reversals and that decentralized finance platforms “They are as secure as the code that powers them”; Therefore, having risk coverage or insurance can be a great option. Especially if the sums invested within DeFi protocols are considerable.
Decentralized insurance protocols
Nexus mutual
As Barton explains, the premise of Nexus mutual is simple but powerful: offering a smart contract risk coverage product without the need for an insurance company.
This Ethereum-based DeFi insurance protocol allows people to share risk together, managing the entire protocol, without the need for an insurer. On its website, the protocol indicates that “Only members can decide which claims are valid. All member decisions are recorded and enforced by smart contracts on the public Ethereum blockchain.”.
Nexus Mutual has a governance token, NXM, which gives its owners a voice within the decentralized governance of the protocol. This same token can also be used to purchase coverage, assess risk, and evaluate claims on Nexus.
At the time of this edition, NXM is worth more than $100 per unit. Meanwhile, the protocol has already been integrated to offer insurance policies to several projects that are developed on the Ethereum, Polkadot, Cosmos and BSC blockchains.
Cover Protocol
This decentralized insurance protocol, operational since last November, offers a peer-to-peer (P2P) coverage market. Cover Protocol uses ERC-20 tokens to enable permissionless and KYC-free coverage.
As Cover is a hedging market, users can essentially bet on the safety and security of the underlying protocol. Within Cover, users can use CLAIM tokens, which are redeemable if a hack or exploit occurs, to stay protected against risk. While those who believe that the underlying protocol is quite secure and that a hack is not feasible, can use NOCLAIM tokens, which are redeemable if no hack or exploit occurs within the protocols.
Cover Protocol also allows you to purchase coverage for all types of products, not just smart contracts and cryptocurrencies.
Other insurance protocols in DeFi
In addition to Nexus Mutual and Cover Protocol, Barton notes that there is an entire emerging insurance sector in DeFi. Other protocols such as Etherisc, opyn y Unslashed offer hedging products and services that can help investors stay safe from imminent risks within these ecosystems, as well as make DeFi a more attractive, reliable, and secure financial space in the future.
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