What is DeFi Insurance? Identifying Business Opportunities and Use Cases

chirag July 14, 2022
What is DeFi Insurance - Identifying Business Opportunities and Use Cases

DeFi applications are at the top of the list as we progress toward sophisticated implementation of digital transformation in the Fintech sector. The way people exchange money is permanently changing as a result of this development.

The DeFi industry is expanding quickly as new businesses, protocols, and applications pop up daily. Therefore, this sector is a force to be reckoned with, with a total worth of $255 billion locked up in its protocols and numerous DeFi unicorns in circulation.

The development and promise of DeFi are astonishing, and what we can’t believe is that the DeFi market is a recent development. August 2018 saw the first use of the word “DeFi.” However, there are obstacles in the way of every success. Hacks and protocol breaches have caused bottlenecks in DeFi’s growth spurt. One could argue that the threat of capital loss is one of the key obstacles preventing widespread commercial adoption of DeFi, along with regulation and education. 

If only there were a means by which you could guard yourself against this? Presenting DeFi insurance – an emerging sector within an emerging sector, yet one that has enormous potential.

To help you understand the concept completely, let’s examine what is DeFi insurance, how it functions, and what business opportunities and use cases it offers.

What is DeFi?

What is DeFi

Decentralized finance, or DeFi is the transformational shift from the mainstream, centralized financial systems toward peer-to-peer financing made possible by decentralized technology based on the Ethereum blockchain. DeFi apps function differently because no centralized entity is in charge of overseeing the entire system.

Anyone having an internet connection can access financial services using DeFi products, which are mostly operated and managed by their customers. The DeFi ecosystem has created a vast network of interconnected DeFi insurance protocols and financial products, ranging from borrowing and lending platforms to stablecoins and tokenized BTC. With a variety of use cases for people, developers, and institutions, decentralized finance has surfaced as the most active industry in the blockchain environment.

DeFi’s breakthrough seems to be that crypto assets can now be used in ways that fiat or “real world” assets cannot. Applications that can only exist on blockchains include synthetic assets, decentralized exchanges, and flash loans. 

There are several benefits to this paradigm change in financial infrastructure in terms of opportunity, risk, and trust. DeFi is causing the banking sector to rapidly change, so it’s high time for you to look into new possibilities. Billions of dollars worth of cryptocurrency have already passed across DeFi applications, and that amount is increasing daily.

Pros and cons of DeFi

Pros and cons of DeFi

What is DeFi insurance?

The definition of DeFi insurance is identical to that of traditional insurance. In DeFi, insurance essentially refers to protecting yourself from financial losses brought on by occurrences within the DeFi ecosystem. Just like how blockchain serves as a safety net for the mainstream traditional insurance industry, DeFi insurance protocols can provide preventative steps and serve as a safety net for the crypto industry.

Suppose you have some money invested in a DeFi platform or protocol. You are aware that any flaws in the DeFi infrastructure could cost you money. So, you can buy DeFi insurance as a precaution against the possibility of losing your money on the DeFi platform.

In case you lose money on the platform and want coverage, you can go to an insurer of DeFi assets and get paid a certain amount. Decentralized financial insurance premiums are determined by many variables, including the type of coverage, provider, and the length of the policy. Consumers must, however, also gain a thorough awareness of the various kinds of incidents for which they can purchase coverage.

Just like with traditional insurance coverage, you should be aware of what you are protecting yourself against in the DeFi world.

The DeFi insurance market is still young. However, this is expected to expand quickly in the near future due to the rising volume of transactions in decentralized finance.

Protocols, systems, and processes will develop and mature as the industry expands, new protocols will be in use, there will be more possibilities for coverage, and more DeFi value will be covered.

Below is a list of some businesses that offer DeFi insurance right now. But as the sector expands, many more businesses are anticipated to join.

  1. Union
  2. InsurAce
  3. Solace
  4. itrust.Finance
  5. Insure DeFi
  6. Nexus Mutual

This list is not all-inclusive. You can carry out research and choose the service providers who best meet your needs.

How does DeFi insurance work?

If it didn’t take place in a decentralized manner, DeFi insurance wouldn’t live up to its name. You purchase coverage from a distributed network of coverage providers as opposed to one individual or business.

A provider of coverage can be anyone. You accomplish this by placing capital into a so-called “capital pool.” You essentially turn into a liquidity provider in this way. As a provider of coverage, you get to pick which occurrences or protocols you want to cover. 

For instance, you may have a high degree of confidence that trade X won’t be compromised. As a result, you have no problem adding liquidity to the capital pool that is designated to cover that particular incident. The money in the capital pool would then be used to pay claims from customers who purchased coverage against a hack, so should platform X still be compromised?

Of course, you run the risk of providing coverage. For this reason, as a supplier of coverage, you receive interest on the funds you lock up. This interest is frequently (partially) covered by the premiums paid by insurance customers.

Business opportunities of DeFi

Blockchain-based applications are exploding in many sectors, and this technology will change how businesses operate. The manner in which customers interact with businesses and make transactions is changing. 

Businesses can greatly benefit from using DeFi technology to expand globally and bring on additional clients. Check out how implementing DeFi can help your business increase profitability, client satisfaction, and scalability.

Trading digital assets

Without a central authority, cryptocurrency exchanges such as decentralized exchanges (DEXs), automated market makers, and token swapping aggregators enable peer-to-peer trading while preserving user sovereignty over their funds. If you have internet access and a wallet like MetaMask, you may access crypto assets from anywhere in the world using DEXs like Uniswap, 0x, Sushiswap, ParaSwap, and many others. Additionally, they are increasingly competing with centralized exchanges.

Rapid transactions

DeFi guarantees that all of your transactions will be smooth, quick, and extremely safe. Due to distributed ledger technology, the transactions are not under the control of a single entity. Customers and connected partners can have a far more smooth financial experience with your company if you use the DeFi application.

This technology is useful for businesses whose employees have to execute several transactions on a regular basis since it reduces the costs associated with using third-party payment services.

Smaller companies in developing areas whose demands are not covered by the conventional banking system have adopted DeFi to some extent. For instance, some enterprises use payment services like Tranglo in ASEAN, BitPesa in Africa, as well as the key DeFi exchanges to send money directly or convert payments into stablecoins guaranteed by the US dollar for international remittance.

Credit card networks

DeFi architecture

Protocols for lending

Platforms for non-custodial, decentralized peer-to-peer lending include Compound and Aave. Both platforms give users the option to:

– Borrow money using their cryptocurrency assets as security and 

– Lend their cryptocurrency at interest rates that are significantly higher than those available in conventional finance.

Aave is credited with popularizing flash loans. Flash loans are quick loans that customers can obtain without providing any security as long as the loan is fully repaid before the block is over.

Improved tokenization

A business’s data and critical information quantities grow over time, and after a certain point, streamlining them becomes difficult. Tokenization is a notion that can assist businesses with decentralized, secure data storage.

By distributing the encrypted information nodes across a decentralized network, tokenization advances the encryption process. As a result, it becomes impossible for hackers to alter or falsify the data.

Yield farming

Yield farming, which is exclusive to DeFi, enables users to stake their cryptocurrency assets in different non-custodial DeFi protocols to earn high fixed or floating interest rates. Some of the best yield farming protocols include Idle Finance, Yearn, Vesper, and Enzyme.

Users must manually look for protocols that have the highest yields in the absence of yield farming services and then transfer their cryptocurrency holdings to that platform to increase their earnings. Consider it a crop rotation, where the fields are the protocols that will yield the maximum profits, and the seeds are the idle crypto assets. For yield growers and liquidity providers, Yearn Finance streamlines this process by automatically identifying and switching to the most lucrative prospects.

Know from our experts

DeFi insurance use cases 

Numerous hacks of smart contracts, cyberattacks on exchange platforms, and other incidents over the past few years have resulted in significant losses of investor money. Even the generous DAO was powerless to stop a virus attack on its infrastructure that cost billions of dollars. There are many DeFi insurance use cases that can assist in avoiding these outcomes.

DeFi insurance use cases

Crypto insurance

Investors are increasingly seeking measures to prevent their investments from being stolen since the cryptocurrency market continues to be a very exposed industry, vulnerable to everything from cyberattacks to rug pulls. While there are several ways to accomplish this, one that guarantees the security investors desire would be through crypto insurance, which guarantees to return your money even if a terrible event occurs.

When you take into account the volatility of the bitcoin environment, crypto insurance becomes crucial. Massive thefts from online wallets and exchanges have occurred as a result of the increasing value of cryptocurrencies such as bitcoin. 

As an illustration, in January 2018, a cryptocurrency valued at $500 million was looted from the Japanese crypto market, Coincheck. A fragile ecosystem has been created as a result of these hacks, which the conventional banking ecosystem either dismisses or avoids taking seriously.

Protection of collateral for loans backed by cryptocurrency

Collateral Protection Insurance offers borrowers and lenders a feeling of security from cryptocurrency lending networks in today’s turbulent market, which is a crucial step in furthering blockchain adoption. In a common scenario involving crypto loans, the loan is typically repaid by the insurance contract if the borrower’s specified collateral is lost or stolen. 

As an incredible use of decentralized insurance, a consortium was founded by Etherisc and several other businesses, including Nexo, Sweetbridge, Libra Credit, Celsius, and a few more, to protect and safeguard collateralized crypto-backed loans.

Smart contract coverage

Ironically, the ability to trust smart contracts is one of Ethereum’s biggest problems. The blockchain assures us that smart contracts will function as intended, but how can ordinary people have the same assurance?

There have been three well-publicized “hacks” of Ethereum smart contracts since mid-2016. All of these hacks resulted in significant amounts of money being lost in ways that were obviously contrary to the code’s design.

The Ethereum community has benefited significantly from a safety net called the Smart Contract Cover. The product is intended to pay out claims in the event of “unintended code use that leads to a significant financial loss”. It functions as a guarantee that increases user confidence that their money won’t be lost due to problems, and it increases developer confidence in deploying contracts.

Crypto wallet protection

Solutions for the risk of cryptocurrency wallet theft in the event of attacks have been created by businesses like Etherisc. A lot of consumers in the survey that Etherisc conducted to identify the demand for decentralized insurance agreed that wallets needed to be insured but that there were few solutions on the market for the same. Etherisc offers crypto wallet insurance that covers a significant amount after realizing that such solutions were in fact needed. It is a great application of decentralized finance.

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Learn how Appinventiv can help you in adopting blockchain technology successfully

DeFi is the future of financing for all sectors of the economy and is here to stay. Customers are moving to decentralized facilities for manufacturing, whether it be in the corporate or consumer product sectors. The time is apt for businesses to adopt blockchain technology and begin a bold digital transformation.

To satisfy all of your company’s needs, Appinventiv provides a wide range of blockchain application development services. We have got you covered, be it blockchain app consultation, smart contract development, crypto wallet development, or more.

We provide comprehensive services and have all the key frameworks, including Ethereum, Hyperledger, Multichain, Stellar, and Tron. 

Get in touch with us to find out how we can help you expand your company more quickly while also enhancing the client experience.

Conclusion

Due to the security and transparency, it offers to investors, decentralized insurance is a fast-growing industry. There are currently only a few products on the market, but there is definitely room for growth and expansion. For many years to come, DeFi and its applications will dominate the industry.

FAQs

Q. What is DeFi?

A. Decentralized finance is abbreviated as DeFi. It serves as an umbrella term for the segment of the cryptocurrency community that is focused on creating a new, internet-based financial system by employing blockchains in place of established trust and intermediary systems.

Q. Is DeFi a wise investment?

A. The decentralized finance (DeFi) sector is expanding quickly, with the ecosystem’s first valuation of over $100 billion coming in the middle of 2021. It may be a smart idea to invest in DeFi projects today since they are still in development compared to traditional financing (TradFi) initiatives and will likely experience a correction in 2022.

Q. What is DeFi insurance?

A. The concept of insurance in DeFi basically focuses on insuring yourself against the losses due to events in the DeFi ecosystem. 

Q. What are some of the key applications of DeFi insurance?

A. There are many DeFi insurance use cases that can safeguard users from hacks and cyberattacks happening in the the DeFi ecosystem:

  • Crypto insurance
  • Protection of collateral for loans backed by cryptocurrency
  • Smart contract coverage
  • Crypto wallet protection

Q. How safe is DeFi?

A. DeFi isn’t perfect. DeFi projects don’t necessarily provide the same level of security as traditional ones do, despite the fact that they eliminate intermediaries from traditional financial services.

THE AUTHOR
chirag
Blockchain Evangelist
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