Decentralized finance (DeFi) is one of the most impactful innovations in the global crypto markets, enabling crypto traders and investors to earn double/triple-digit yields on their holding.
However, using DeFi applications comes with its own share of risks, with protocol hacks being relatively common. In 2021, over USD 12bn was lost as a result of DeFi hacks. This is why DeFi insurance is starting to play a bigger role in the space.
What is DeFi insurance?
Decentralized insurance was created to make the DeFi markets safer for investors.
Decentralized insurance is a product similar to traditional insurance that protects a buyer from a potential financial loss that can be caused by a range of possible events. Some DeFi traders even buy insurance as a hedge against market volatility and to secure their profits.
DeFi insurance policies are often valid for a specific period, and users are rewarded for claimable losses that occur within the validity period.
Read on to discover a list of DeFi insurance protocols that provide users with coverage against various losses on decentralized finance applications.
InsurAce is a decentralized insurance protocol that aims to provide DeFi insurance services to users who use DeFi applications. It promises to protect users from security risks with user-friendly products carrying low premiums.
Anyone with a self-custody wallet like MetaMask or Trust Wallet can purchase covers simply by connecting their wallet to the InsurAce app. InsurAce offers portfolio-based and bundled covers with different pricing methods allowing users to insure all of their DeFi assets in one place instead of through multiple protocols and several transactions. The know-your-customer (KYC) process is not required.
InsurAce provides coverage for events when smart contracts or fund custodians get hacked, for rug pulls, Initial DEX Offering event risk, and when a stablecoin falls significantly below its pegged price. It supports the Ethereum (ETH), Binance Smart Chain (BSC), Polygon (MATIC), and Avalanche (AVAX) blockchains.
Opium Insurance, a product of Opium Finance, is built for DeFi traders, covering impermanent loss, smart contract hacks, credit default events, stablecoin custodian insolvency, price volatility, Simple Agreement for Future Tokens (SAFT) risks, and off-chain risks.
Users can buy or sell the insurance as the need arises, choosing from different types of insurance available. They can also decide to stake money into the pools and earn extra interest.
On the platform, buyers select an insurance product, pay a premium to the pool, and then receive a tokenized insurance position. This position can be traded on the insurance secondary market and can also be used to claim a payout when you have a successful insurance claim.
Solace is a decentralized finance insurance protocol that provides coverage policies for Aave (AAVE), Compound (COMP), Uniswap (UNI), and others. It’s a risk management protocol for DeFi protocols, providing coverage and compensation for losses.
The protocol aims to help liquidity providers hedge their risk when there is a potential for a smart contract hack.
Solace has a single capital pool to underwrite risks across every insurance policy offered. The users who provide capital for the pools earn revenue from policy sales and other protocol incentives.
This DeFi insurance platform doesn’t require KYC and automatically validates insurance claims within the Solace network, with payouts conducted in a single transaction. It calculates how much a user lost exactly and pays it out to them.
Solace is currently only available on the Ethereum network but aims to be a cross-chain platform, with plans to launch on Polygon, Aurora (AOA), and other Ethereum Virtual Machine (EVM)-compatible chains.
Launched in January 2021, Unslashed is a decentralized insurance protocol that provides cover for common risks for crypto assets. It provides nearly instant liquidity to insurance buyers and risk underwriters to ensure constant collateralization.
The DeFi insurance protocol covers crypto exchanges and wallets, smart contract exploits, stablecoin pegs, oracle failures, and other types of risks that traditional insurance wouldn’t cover.
Just like other decentralized insurance products, crypto holders can underwrite the risk by depositing funds and earning returns. Currently, investors who deposit funds to pools can earn between 4% and 5% yield on the crypto deposited with Unslashed.
For insurance buyers, Unslashed uses Kleros, a decentralized arbitration service, to resolve disputes on the protocol. It employs independent assessors and arbitrators to review the claims based on the insurance policy documents and the evidence provided by the claimant. It claims to have an unbiased and transparent process to ensure users get the best service.
With more money moving from traditional fixed income products to DeFi money markets, DeFi insurance products will only get more popular. Most of DeFi insurance protocols aren’t that big yet, but their products could help to stabilize the often erratic DeFi market and make investors feel more at ease when diving into it.