Editor's Note: This article comes from01 Blockchain (ID: Binary010101), reproduced by Odaily with authorization.

Editor's Note: This article comes from

01 Blockchain (ID: Binary010101

01 Blockchain (ID: Binary010101

), reproduced by Odaily with authorization.

Today, the DeFi craze continues.

The bustling DeFi market makes wealth passwords seem to be within reach, and also obscures the security issues of contracts. However, with the rapid development of DeFi and the rapid expansion of capital scale, problems of ecological economic security and extreme risks have occurred from time to time.

Whether it is a negligent contract loophole or a deliberately designed "killing pig", behind the popularity of DeFi, there are always leeks who are paying for "cognition".

Three months from 1 billion to 10 billion

According to data from DeFi Pulse, an on-chain data resource website, the total USD value locked in the DeFi protocol has grown rapidly from approximately USD 500 million to USD 1 billion, and it took a year. And it took less than three months to go from $1 billion to $10 billion.

On August 31, 2020, the total lock-up volume in the entire DeFi world exceeded $10 billion for the first time. By September 2, the total lock-up volume climbed again to $12.29 billion.

image description

Figure: DeFi lock-up value

image description

However, with the rapid expansion of the market, the DeFi ecosystem has also encountered many problems that need to be solved. The biggest feature of DeFi lies in its openness to users and contracts. Although this openness effectively solves the risk problems of bad debts and defaults caused by the lack of openness and transparency in the traditional financial field, it also makes it extremely easy for hackers to attack. target.

The following table shows five typical security incidents with a moderate level of harm that occurred in the DeFi ecosystem last month. "Wanhui Dovey" also broke the news on social media on August 24 that the new liquidity mining project chick was found by the audit team to have a contract backdoor, and the team can transfer the funds in the contract at any time.

These security issues and risk events accompanying the expansion of the DeFi ecosystem not only affect the healthy development of the DeFi ecosystem, but also have a negative impact on the entire cryptocurrency industry.

Table 1. Typical DeFi security incidents in July 2020

image description

Data source: PeckShield Situational Awareness Platform

In the DeFi world, the smart contract itself means everything, and any loophole in the contract code may directly cause fatal consequences. In such a market, the value of insurance becomes more prominent.

Although the traditional insurance industry has a long history of development, it has now formed a relatively mature product development and operation system. However, unlike the traditional financial system, the financial ecology built with blockchain as the underlying technology——DeFi itself is a kind of innovative financial industry with disintermediation, so the centralized insurance products and services provided by the traditional insurance industry have been difficult to adapt to DeFi New types of risks in the ecology.

If you want to provide targeted risk protection for security issues such as common hacking incidents in open finance, you need to use blockchain and other emerging technologies to reform and design insurance products, that is, non-tamperable and mandatory security based on blockchain technology. The self-executing smart contract technology builds a new type of decentralized insurance agreement - DeFi insurance. This will be the most effective way to solve the existing security problems of the DeFi ecosystem and prevent risk events, and it is also a prerequisite for the sustainable and rapid development of the DeFi ecosystem.

secondary title

The Current State of DeFi Insurance

Nexus Mutual is a community-based insurance platform that mainly provides smart contract insurance services, that is, it only provides corresponding protection against the risk of smart contract vulnerabilities that may exist in DeFi protocols. Similar to traditional mutual insurance, on the Nexus Mutual community platform, only community members who have paid a certain amount (0.002) of ETH can purchase smart contract insurance. At the same time, the mutual fund pool of the platform is pledged to the platform by these members In addition, these members will participate in platform governance links such as risk identification of corresponding smart contracts, insurance pricing, and claim evaluation.

Source: 01 Blockchain

Except for Nexus Mutual, other insurance platforms at this stage mainly provide decentralized insurance services in the form of financial derivatives, that is, to achieve the purpose of preventing risks by providing derivatives with certain guarantee properties. Compared with traditional financial derivatives on centralized exchanges, DeFi derivatives insurance has the natural advantage of being permissionless and trustless. Taking Opyn as an example, it provides hedging insurance services for asset price changes through decentralized option agreements.

Table 2. Typical product comparison of two forms of DeFi insurance

image description

Comparing the two forms of DeFi insurance, the Nexus Mutual platform in the form of a mutual fund pool has a first-mover advantage. It is one of the earliest projects to explore DeFi insurance, and from the statistical point of view, it has developed rapidly since its launch. On August 20, 2019, the insurance amount of Nexus Mutual was 615,559 US dollars, and the accumulated premium was 3,714 US dollars ; After a year of development, as of August 20, 2020, Nexus Mutual's insurance amount has reached US$37,756,000, an increase of approximately 60 times, and the cumulative premium has reached US$280,956, an increase of approximately 75 times.

The form of DeFi insurance using financial derivatives as a tool has the natural advantages of not requiring permission and trust, and may have a huge impact on Nexus Mutual in the future.

secondary title

Future challenges for DeFi insurance

DeFi insurance is an insurance product designed based on blockchain as the underlying technology. Its design concept usually adheres to the principles of decentralized network without access, cryptography technology verification, and independent identity data. It focuses on non-custodial solutions. There is no apparent centralized authority controlling financial activity.

Table 3. Advantages of DeFi Insurance

image description

Source: ZeroOne Finance Binary compiled according to financial report data

Compared with traditional insurance products, DeFi insurance has unique technical advantages. The application of technologies such as smart contracts makes all aspects of DeFi insurance no longer based on "artificial trust", which greatly eliminates the intermediate links of traditional insurance services, which can effectively reduce the cost of insurance companies, reduce the premiums of policyholders, and increase insurance compensation efficiency and transparency etc.

At present, DeFi insurance is still in its infancy, and the future development potential and growth space are huge. The security problems and frequent risk events in the DeFi ecosystem, as well as its own product advantages will promote the rapid development of DeFi insurance. It can be expected that in the next few years, there will be more and more innovative attempts in the field of decentralized insurance. But based on the present, there are still many problems that need to be solved in the development of DeFi insurance.

First of all, the current global insurance market is mostly opaque and dominated by a small number of large insurance companies. The information transparency required by DeFi insurance is difficult to achieve in the mainstream market; at the same time, the lack of professional insurance knowledge of private individuals makes them autonomous. The setting and maintenance of the participation agreement is difficult to become a reality.