DeFi Insurance 101: Basics for Newbies
Have you ever taken a step back and realized we are living in an age where the future of finance is taking shape at this very moment? Not just metaphorically, we are actually witnessing the finance world change and the concepts of authority and ownership being questioned by a decentralized structure that seems dedicated to disrupting the central organizations that steer our financial decisions and actions.
Yes, we are talking about DeFi. The ever-growing DeFi’s total value locked (TVL) stands at $210 billion which is more than double the year-ago date’s TVL of $95 billion. Unfortunately, such rapid growth is not only attracting investors but also hackers.
According to London-based firm Elliptic, the total value lost by Defi exploits in 2021 totaled over $10b. The total loss in 2022 already reached $1,2 billion. It is evident that DeFi hacks grow in quantity and severity in parallel with the growth of DeFi.
DeFi insurance is the DeFi’s response to hacks, scams, and all other kinds of ill-intended actions that can cause damage to users. It is based on the idea of compensating for losses suffered. Although DeFi insurance is not a preventive measure for hacks, it is the best way to repair the damage done to users. But how does it work and how is it different than traditional insurance? Both questions are answered below.
DeFi Insurance Explained
The definition of insurance in DeFi is not so different from traditional insurance. They differ in terms of accessibility, responsiveness, and transparency. DeFi insurance has the advantage of being decentralized, meaning it functions with minimal intermediary involvement, making it more affordable and agile compared to its traditional counterpart.
Until the emergence of DeFi insurance, monopolized traditional insurance providers had the insurance market cornered, creating a high barrier to entry for users. DeFi insurance proved the insurance industry could be more user-centric and more accessible. To understand why let’s take a look at the underlying metrics of DeFi insurance without getting too technical.
How Does DeFi Insurance Work
In DeFi insurance, any crypto owner can be an insurance provider. By locking up capital in a capital pool set up by a DeFi insurance platform, users get staking rewards for their staked tokens. These rewards involve special liquidity provider (LP) tokens, voting rights, and interest earnings.
Insurance platforms use the liquidity provided by LPs to compensate for losses suffered by their clients. Smart contract hacks are the number one reason DeFi users lose their assets and require insurance protection.
Okay, but how do DeFi insurance platforms decide which claims to accept and which to reject?
There are several ways to do that.
DeFi insurance protocols often use a DAO (Decentralized Autonomous Organization) structure. In such a structure, holding the token of the insurance protocol gives users governance rights, so that they can vote to accept or deny claims. This is where we can see decentralization in action.
Sometimes claims are automatically verified via oracles- 3rd party services enabling blockchain smart contracts to access external, real-world data. They help DeFi insurance protocols minimize the possibility of dispute in claim processing. Oracles also help decentralized insurance providers adjust their prices accordingly so that users always get the most accurate offer.
Either way, claims processing is much faster in DeFi insurance compared to traditional insurance.
CoverCompared makes things even easier
There are many DeFi insurance protocols out there. It can be difficult to find the best insurance service in a vast marketplace. CoverCompared acts as an aggregator for DeFi insurance providers to access masses.
CoverCompared takes the task of revolutionizing the insurance industry seriously. Using our dApp, users can quickly compare and buy health, travel, and electronic device protection in just a few clicks.
A DeFi insurance aggregator, CoverCompared offers a wide variety of insurance policies that can be purchased at affordable rates and with zero gas fees levied. We take pride in being a one-stop shop for users to get the most beneficial insurance coverage for their assets in a few clicks.
About CoverCompared
CoverCompared is the First DeFi insurance marketplace for the global crypto ecosystem. We aim to lower transactional and administrative costs of insurance policies and coverage while providing high-value, cost-effective insurance products bought using a host of cryptocurrencies.
Our platform will be connecting users with multinational insurance providers for all global insurance products such as crypto-related protection, health, life, and travel policies. The platform will include a frictionless insurance marketplace experience incorporating next-generation blockchain technology and tokenized incentives.
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