Introduction
When it comes to financial markets and investing, the market always has a 50/50 percent chance of going either way. Despite all the expert predictions and technical analysis, it is impossible to predict the next turn of the market with perfect accuracy. It happens because several variables are acting on the market at a given time. However, investment insurance is an option where the investors can ensure that they can prevent any exorbitant losses and create a safety net for their positions in case of an unexpected market turn.
What is Investment Insurance?
Insurance for asset classes such as stocks, bonds, and dividends is not available in any country in the world. The main reason that any type of traditional investment option is not covered under y insurance is that investment is an act of taking a risk. When a person has savings in their bank accounts, the amount of up to $250,000 is insured by FDIC or Federal Deposit Insurance Corporation. However, the money present in the form of savings usually does not provide any benefit for the holder.
At the same time, the owner of the savings also continues to lose the value of their money on account of factors such as inflation and money devaluation. Therefore, many savers decided to convert their idle reserves into investment options such as bonds, stocks, or mutual funds. However, as soon as the savings are turned into an investment, they are no longer insured.
Usually, the higher the risk factor related to an investment option, the greater its profit return percentage is set. On the other hand, Federal Reserve grants insurance coverage to the investors for broker protection and dealer bankruptcy under the SIPC or Securities Investor Protection Corporation.
What is DeFi Insurance?
The investors understand that DeFi is a term stemming from the blockchain sector, which means Decentralized Finance. It represents a financial network that works without the presence of any centralized supervisory authorities such as Central Banks. The main investment options present in the DeFi space are cryptocurrencies, NFTs, stablecoins, tokens, digital coins, and other decentralized currencies. DeFi Insurance is an option for cryptocurrency investors to protect their investment positions from falling into steep debts or losses.
It is worth noting that in the real world, the term insurance is used to grant financial protection to the legal beneficiary. In most cases, people can get an insurance policy to cover their health plans, wedding plans, real estate property, business development assurance, etc. The person or corporation that draws an insurance policy agrees to fill a set amount every month, called premium. In exchange, if the person is faced with any sudden financial or other emergencies, the insurance company grants them considerable monetary aid.
One of the main reasons that many people are cynical about investing in DeFi products is the lack of security. Many people believe that DeFi tokens prices are volatile, and they have a considerable number of variable factors affecting them. Therefore, on one end, investing in DeFi can be very rewarding on account of massive risk factors.
On the other hand, in case of a loss, investors can sustain massive losses. Therefore, DeFi insurance provides a secure option for prospective cryptocurrency investors who can maintain and mitigate their investment risks with this option. Several DeFi Insurance protocols are operating in the cryptocurrency market. Therefore, a successful investor should study their services to pick the best option offering the maximum financial benefit.
How Does DeFi Insurance Work?
DeFi Insurance is a simple procedure. First of all, the investors need to understand that, just like traditional finance, it is not possible to offer an insurance policy to cover the losses from the DeFi products such as cryptocurrencies or tokens.
It means that the investors should pick their preferred cryptocurrency investments carefully before creating new positions. If a cryptocurrency investor with DeFi Insurance ends up losing money on account of price volatility, their insurance policy is not going to make up for their losses.
On the other hand, the main focus of DeFi protocols is to make sure that the investors do not lose money on account of external factors. For example, if a DeFi corporation goes bankrupt, the DeFi insurance policy will compensate the investors for the amount that was locked in the organization.
In the same manner, as the DeFi insurance policy, the holder also has to pay a specified amount of premium to retain the policy under their usage. In many cases, a DeFi protocol can fail or crash on account of factors like technical error, malware, hack attack, sudden price crash, lack of resources, and smart contract decline, among others.
The Need for DeFi Insurance
The main purpose of DeFi insurance is also its main use case. There are no cryptocurrency investors who do not want to ensure that their investment positions do not drown on account of external market factors.
Therefore, rather than losing a massive amount of their investment positions, investors prefer to draw an insurance policy in exchange for the premium payment. It entails that the consumers are required to pay extra to draw a DeFi insurance policy. Another important factor to keep in mind is that during the last two years, the growth in the blockchain space has become exponential.
Among the rapidly increasing number of DeFi protocols, it has become more challenging for consumers to find the most stable and trustworthy DeFi investment platforms. Even the biggest DeFi platforms in the world, such as TerraForm Labs, have faced the burn of the market pressure and failed to remain in operation.
It can be very challenging for a cryptocurrency investor to keep an eye on the market while the DeFi protocol they are investing in collapses without warning. Therefore, DeFi insurance can work as a safety net to protect the financial interests of cryptocurrency investors.
How to Sign Up for a DeFi Insurance Policy?
It is worth noting that different DeFi protocols offer different types of DeFi insurance coverage. At the same time, the method of signing up for a new DeFi Insurance policy can also differ from one platform to another. However, at their base, all DeFi policies may follow a similar pattern. Here is a basic step-by-step guide for signing up for a new DeFi insurance policy:
- Make a list of all the DeFi insurance platforms that are offering coverage for the DeFi reserves in your portfolio.
- Compare important factors such as premium charges and coverage capacity in the available DeFi insurance options.
- Create a cryptocurrency wallet to connect the DeFi portfolio with the DeFi insurance protocol.
- Work out the expenses that are required to move premium payments, transferring DeFi tokens from one wallet to another beforehand.
- Read the terms and conditions for the DeFi insurance policy in detail. Focus on the reasons that disqualify the policyholder from coverage and financial reimbursement.
- Complete the KYC and AML procedure without any mistakes to create a new account on the DeFi insurance policy platform.
- Make sure to sign a legally bound document digitally or physically before agreeing to pay a premium to any DeFi protocol.
- Discuss and research different DeFi insurance policy plans available on a new DeFi insurance protocol.
- Check reviews and consumer remarks before putting money into any DeFi Insurance protocol to ensure its authenticity.
- Take into account the expenses on crypto exchange required to pay the premium for the DeFi Insurance policy.
- Make a point of comparing the different DeFi Insurance policy plans and their returns before settling for one particular choice.
- If possible, hire the help of legal experts or a professional investment broker to understand all the pros and cons of a new DeFi insurance policy before drawing it.
Claim Maturity and Verification for DeFi Insurance
Many people have heard about a person facing obstacles in qualifying for their insurance claim. DeFi Insurance policy providers are making profits by trying to manage the risks and their probability. Therefore, the rules for qualifying for DeFi insurance policy claims are very detailed and stringent. It happens to make sure that the consumers do not try to trick the insurance providers and get qualified for massive financial reimbursement by forging a loss or bankruptcy.
Anyone interested in getting a new DeFi insurance policy should pay extra attention to all the terms and conditions for that particular insurance policy first and foremost. If there is any ambiguity, the person should not hesitate to ask questions or hiring a legal consultant to guide them. However, one good thing about DeFi insurance claims is that it is more fair and transparent in comparison to traditional financial insurance. Unlike Traditional financial insurance, DeFi claims are processed by automated protocols called DAO or Decentralized Autonomous Organization.
It entails that the governing rights for the DeFi insurance protocols are reserved with the community members and native token holders. Rather than a centralized authority such as a private financial firm, the claims are processed based on votes cast by the native coin holders. It is worth noting that the method of community voting is not universal among all DeFi insurance protocols. DAOs that are used to automatically process DeFi insurance claims are based on Oracles. Oracle programs are used to make calculations based on external and internal data sources.
At the same time, Oracles also distribute all the information to all participants present on the DeFi protocol. In this manner, DeFi insurance policyholders can get instant reimbursement. At the same time, the process of qualification for a DeFi claim is simple and easy. In most cases, as soon as the crash happens, the Oracle and DAO will automatically find all the recipients and reimburse their payments. Under these circumstances, there is little to no chance of facing clashes or disputes during the process of verification of a DeFi insurance policy claim.
Obstacles for DeFi Insurance Protocols
According to careful estimates, the total value of funds locked in DeFi space is valued at around $6 trillion in the current year. However, at the same time, only 2% of the entire DeFi wallet holders have insurance coverage. It seems that the DeFi insurance protocols are facing some issues and challenges in the market that are preventing their further growth and adoption. Here are some of the most basic and rudimentary challenges facing the DeFi insurance sector:
Lack of Clarity
The business model for an insurance provider works on managing risks involved with any policy offer. However, for a DeFi underwriter, it is impossible to define the involved risks with defined clarity. It means that the DeFi insurance providers are unable to properly manage their risks and can feel the pressure from the market on account of massive price volatility and higher risk percentage as an investment option. Due to this reason, many traditional insurance services providing companies have not started to offer DeFi insurance policies.
Underwriting Interest
For a standard insurance policy, the underwriter can collect fees by investing the premium money in different ventures. However, when it comes to DeFi insurance ventures, the underwriters are only able to make a profit by collecting cryptocurrencies in the form of insurance premiums.
To ensure the safety of the DeFi insurance ventures, most chose to retain the insurance premium and not use it for investing, which can create an issue if more than the sanctioned number of users qualify for a claim. Due to limited funds, the DeFi insurance platform can fail to reimburse the policyholders.
Decentralized Finance
Many investors take up an issue for completing the KYC and AML user verification process for DeFi insurance policy signing up. For most people, DeFi means providing them with a platform outside of the reach of the centralized governments and any other financial regulators. However, since DeFi insurance protocols carry a certain amount of investment risk, they are subject to regulations.
At the same time, these insurance platforms also want to make sure that the identity of the consumer and the details provided by them are authentic. Otherwise, threat actors can create fake identities and draw fake insurance policies to qualify for insurance coverage. Therefore, most DeFi platforms ensure that users follow the KYC and AML requirements to create an account.
Technical Expertise
It is worth noting that DeFi insurance protocols require a massive amount of technical, legal, and financial knowledge. Any party lacking in any of the above areas cannot create a viable and reliable DeFi insurance platform. At the same time, hackers can target the DeFi insurance protocol to exploit personal information about their users or to steal cryptocurrencies from the premium pool. Therefore, it also takes a lot of work and skill to make sure that the information, account affiliations, and user data are secure on a DeFi insurance protocol.
Top DeFi Protocols in 2022
Now that the inner working and basic dynamics of DeFi insurances are clear, it is time for the reader to learn about the most popular options. By getting a basic idea about the most successful DeFi platforms in the cryptocurrency sector, the investors will be able to find the most suitable choice for them based on their features and coverage capacity. Here are some of the best-rated DeFi insurance options available in 2022:
Bridge Mutual
Bridge Mutual is known for providing cryptocurrency investors with the freedom to choose from a wide variety of options. The users can not only draw a DeFi insurance policy contract but also create an account and sell/purchase different types of cryptocurrencies. Coverage options are extended to stablecoins, hack attacks, technical outages, and DeFi exploits.
Solace
The main focus of Solace DeFi insurance is to safeguard investors from the risks involving smart contract attacks. Since the spread of DeFi, countless new projects are emerging every day. It means that hackers are getting good at targeting smart contracts. Solace also offers protection for high-capital positions. It provides automated claim processing and verification.
Unslashed
In addition to just DeFi products, Unslashed provided insurance coverage for a wide range of investment options. The main benefit of using this platform is to allow the use of rapid access to liquidity pools for both policyholders and underwriters. At the same time, its automated claim verification option makes it transparent and reliable.
Nexus Mutual
Nexus Mutual is a highly sought-after DeFi insurance protocol since it is present on the Ethereum blockchain. Therefore, it has immediate access to a wide and diversified cryptocurrency pool. After offering insurance protection, the users can earn governance rights to the policyholders using Yield, Custody, and Protocol Tokens.
Insurance DeFi
Insurance DeFi is a platform that is sought for its feasible coverage plans against price devaluation, cryptocurrency scams, and theft of funds.
Conclusion
DeFi insurance policy is a relief for cryptocurrency investors that grant them protection from financial devastation. Cryptocurrency investors can pay attention to the possible growth of a cryptocurrency token, but they can’t learn about the internal struggles or financial situation of a DeFi protocol. On account of recession and economic decline, people have become more cautious with their money security. Under such circumstances, DeFi insurance is one of the best ways to mitigate the financial risks connected with the cryptocurrency sector.
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