Editor's Note: This article comes fromCointelegraph Chinese (ID: CointelegraphChina), Author: Alex, reproduced by Odaily with authorization.
Cointelegraph Chinese (ID: CointelegraphChina)
Cointelegraph Chinese (ID: CointelegraphChina)
, Author: Alex, reproduced by Odaily with authorization.
In this fiery summer, DeFi (decentralized finance) has been developing in full swing in the encryption circle, and many concepts such as DEX, liquidity mining, Yield Farming, oracle machines have taken over to fuel it. The rapid market rotation has also made some players start to think about what are the next hot spots and opportunities in the DeFi ecosystem. Considering the recent rapid expansion of DeFi funds, and the frequent security incidents and extreme risks in the past, DeFi insurance quickly attracted the author's attention.
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In the traditional financial field, insurance has a long history and is quite mature. With the rapid development of technology in the times, the insurance industry is also placing more emphasis on digitization and data migration to the cloud, gradually carrying out core system transformation. In recent years, with the rise of blockchain and smart contract technologies, insurance is also regarded as one of the valuable landing scenarios. Thanks to the "trustless" feature, blockchain and smart contracts can not only eliminate the problem of low management efficiency, but also reduce the high cost of governance and supervision, and realize the beautiful vision of "In code we trust". At this stage, because the infrastructure in this area still needs to be improved, the combination of blockchain and smart contract technology with insurance has not yet been truly out of the circle, and it is more of an innovation and attempt in the encryption circle.
Centralized insurance: It is no different from traditional insurance. Most of them are large-value legal currency insurance policies, which are purchased from traditional insurers by encrypted exchanges, wallets, and custodians. For example, in April 2019, Coinbase said it held a $255 million hot wallet policy, created by Lloyd's registered broker Aon, a group of US and UK insurance companies launched by a global group that includes certain syndicates of Lloyd's of London. In addition, BitGo, METACO, Ledger and other companies in the industry have stated that they provide encrypted asset insurance. It is worth noting that this type of insurance is usually denominated in legal currency, and the scope of coverage is described in a vague manner, lacking a good mechanism in terms of flexibility and transparency.
Decentralized insurance: Compared with centralization, the advantages of decentralized insurance are more trustless, faster repayment, higher flexibility and exemption from intermediary costs. Any financial system needs effective insurance and hedging tools, and the DeFi economy is no exception. Decentralized insurance solutions are an indispensable infrastructure for its development and maturity. It is worth mentioning that although many public chains have recently announced plans to deploy in the direction of DeFi, the DeFi ecology of Ethereum is still the most prosperous at this stage, leading by a large margin with absolute advantages. Therefore, most of this article revolves around the DeFi and insurance situation on Ethereum. It is not difficult to observe that there are currently two main factors driving the demand for decentralized insurance: 1) Since the beginning of 2020, the locked funds in the DeFi field have risen from US$680 million to US$6.8 billion (a compound annual growth rate of 3530 %), achieving an order of magnitude breakthrough; 2) DeFi security incidents and major market changes occur frequently, and the hidden risks are extremely high. Existing DeFi insurance projects are mainly mutual insurance and financial derivatives, the number and types are relatively limited, and there is still a lot of room for development.
List of DeFi insurance projects Drawing: Cointelegragh Chinese
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The Nexus Mutual and Opyn projects are currently representatives of DeFi insurance platforms, providing decentralized insurance services in the form of mutual fund pools and option derivatives respectively. The specific differences between the two are shown in the following table from multiple dimensions.
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Nexus Mutual's first product is smart contract insurance, which only covers "unintended use of code." When the specified smart contract is hacked and there is a major loss (more than 20% of the insured amount), the insured member can make a claim. The smart contract works normally as expected, and the loss of assets due to other external factors is not covered by the insurance. The platform currently supports 32 smart contracts on Ethereum, and the three projects with the largest insured amount are Curve, Yearn.Finance and Syntheix. Compared with the huge locked-up funds of US$6.8 billion on Ethereum DeFi, the insurance scale of Nexus Mutual is relatively limited. Since its operation in May 2019, the total insurance amount of the platform is US$37.76 million, and the premium is US$280,000. The only claim that Nexus Mutual passed was the two lightning loan attacks suffered by bZx in February this year, while more than 20 other claim applications were rejected. Multi-million dollar loss event.
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On the design level, as its name implies, Nexus Mutual is a community-based insurance platform, where members pledge the platform token NXM to form an asset pool, and participate in the risk assessment of the corresponding smart contract, insurance pricing, claim voting and Platform governance and other processes. While the pledger earns income (premium sharing), it also faces related risks (repayment loss). At present, the total value of NXM pledged on the platform is 195 million US dollars (accounting for nearly 3% of DeFi). The three contracts of Compound, Uniswap and Curve have the highest pledge amount, which means that participants believe that these DeFi projects are relatively safe and have a good profit-risk ratio.
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Data source: Nexus Mutual, drawing: Cointelegragh Chinese
Opyn is different. Simply put, it is a decentralized (no custody) option agreement, which provides hedging insurance services for asset price changes through options. Compared with options products on centralized exchanges, Opyn has the natural advantage of not requiring permission and trust, and insurance buyers do not need to worry about counterparty risks because the seller needs to over-collateralize. The oToken (such as oETH) generated during the seller's mortgage process can be sold to earn premiums (option premiums), or can be added to the Uniswap liquidity pool to earn transaction fees (provide liquidity). The platform currently supports option products in two currencies, ETH and YFI, with a locked position of USD 110 million. Opyn is also insured on Nexus Mutual for its smart contract technical risks, albeit for a negligible amount.
