Editor's Note: This article comes fromVernacular Blockchain (ID: hellobtc), Author: JackyLHH, reproduced by Odaily with authorization.
Editor's Note: This article comes from
Vernacular Blockchain (ID: hellobtc)
Vernacular Blockchain (ID: hellobtc)
Recently, the market has fallen sharply, and Bitcoin has continued to fall for 8 consecutive days. Even so, everyone's enthusiasm for DeFi remains undiminished.
The strong demand for DeFi transactions caused the transaction volume of the decentralized trading platform Uniswap to increase by 283% in August to $6.7 billion. On August 30, its trading volume directly surpassed that of the established Coinbase. Some later imitators have also achieved remarkable results through micro-innovation and liquidity mining incentive mechanisms, such as SushiSwap, in just a few days, the size of encrypted assets locked exceeded 1 billion US dollars, and its Token It even launched the three major offices simultaneously within one day.
On the other hand, there are endless security incidents related to DeFi. According to PeckShield's statistics, a total of 28 security incidents occurred in August this year, of which 8 involved DeFi projects. In the future, as DeFi projects become more diverse and their functions more complex, there will only be more and more hidden security issues.
The safety of funds is always the first. In the highly volatile and high-risk cryptocurrency market, how to ensure the financial security of DeFi projects has become the focus of many people, and the demand for DeFi insurance has gradually increased.
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Blockchain + Insurance
Insurance has a very long history, which can be traced back to the fire relief funds in the ancient Babylonian Kingdom, the funeral mutual aid organization in ancient Egypt, the system of providing living expenses for the families of fallen soldiers in the ancient Roman Empire, and the British Age of Discovery directly gave birth to the modern insurance industry. insurance broker system.
With the development of technology in the times, the current insurance industry has been very developed and perfect in many aspects, but in the emerging blockchain industry, insurance is still in its infancy. There are two main reasons:
First, the blockchain industry is still a niche industry and has not fully entered the vision of mainstream society. The scale of the industry is not worth mentioning in front of the traditional financial industry;
Nevertheless, "blockchain + insurance" still has a lot of room for imagination.
First of all, "blockchain + insurance" can improve the transparency of insurance business. With the advantages of the blockchain being difficult to tamper with, once the insurance clauses are written into the code, there is no need to shuffle and argue with insurance salesmen and insurance companies.
Second, "blockchain + insurance" helps to improve efficiency. In the traditional insurance industry, making a claim is a long and difficult process that often takes a long time. If the claim settlement is written as a smart contract, once the agreed claim settlement conditions are met, the smart contract will enforce automatic execution, which will greatly improve efficiency.
Finally, the permissionless nature of the blockchain and its empowerment on information security issues can bring more new users to insurance.
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Insurance types and representative items
At present, several different types of DeFi insurance agreements have emerged in the blockchain industry to provide guarantee services for various DeFi applications and lending scenarios.
Below, we select a part for a brief introduction.
1. Mutual insurance: Nexus Mutual
Nexus Mutual is currently the leader of the DeFi insurance track, and the price of its token NXM has also been soaring in this wave of DeFi boom.
On Nexus Mutual, users can purchase insurance with a minimum of 30 days and a maximum of 365 days for specific DeFi applications (such as Compound, Uniswap, Aave, Balancer, etc.), and pay with ETH or the stable currency DAI.
Users who pass the KYC certification on the official website and are added to the whitelist can become Nexus Mutual risk assessors. Risk assessors can stake their NXM tokens to the relevant insurance pool and enjoy the premium income generated by other users purchasing insurance. Of course, if there is a smart contract loophole in the DeFi application covered by the insurance pool, which causes damage to user assets and requires a claim, the NXM tokens mortgaged by the risk assessor will be destroyed to compensate the insurance buyer for the loss. Therefore, the benefits and risks of staking coexist.
For insurance buyers, the more NXM staked in the insurance pool, the lower the insurance premium for purchasing the corresponding DeFi products, and the higher the upper limit of insurance that can be purchased.
When a security incident caused by a smart contract vulnerability occurs, the insurance buyer initiates a claim application, and the Staking users in the insurance pool vote to decide whether to pass the claim. So far, there are a total of 29 claims applications. Excluding the 3 applications that are still being processed, only 3 of the first 26 applications have been successfully approved, and the others have been rejected. Therefore, some people complained about Nexus Mutual and said: "Whether to pay or not is decided by the vote of the currency holders. You bought insurance, and the shareholders of the insurance company decide whether to pay or not if the car crashes? The answer is of course no compensation."
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Figure: Final voting on claim application
Let’s talk about NXM tokens in particular. Nexus Mutual's official website requires KYC certification before you can purchase its insurance products and enjoy other services. Due to the laws of different countries and regions, Nexus Mutual is not open to everyone.
Therefore, WNXM token (Wrapped NXM) appeared, which is obtained by 1:1 mapping of NXM token (and has not been officially recognized), just like mapping BTC to WBTC. NXM is supported by the growth of Nexus Mutual's insurance business, while the price of WNXM is more driven by market transactions, which will cause the exchange ratio of NXM and WNXM to not always be stable at 1:1, resulting in the so-called " The arbitrage space of internal and external market".
Mutual DeFi insurance, in addition to Nexus Mutual, also has MDS (Mutual DAO System).
2. Insurance based on derivatives: Opyn
Opyn was established in 2019 and was mainly a margin trading business at that time; in February this year, Opyn transformed into an insurance platform, and launched the first batch of protective option products for ETH holders at the end of March. In addition to ETH, Opyn has also opened option services for BAL, YFI, CRV, and Comp.
Therefore, in essence, Opyn is a decentralized option protocol, which provides hedging for price fluctuations of encrypted assets through options, thereby realizing the function of insurance.
For example, if a user is worried that the price of ETH will fall in a month and cause assets to shrink, he can go to Opyn to buy a put option on ETH. If ETH really falls a month later, the profit from the put option can make up for the loss caused by the price drop, thereby realizing hedging; if the price of ETH does not fall, or rises, then the user only loses the money for buying the put option .
There is also Hegic, a DeFi insurance similar to Opyn. The difference between the two is that Opyn's option products use a seller's over-collateralization model, and Hegic uses an option liquidity pool model (similar to Aave and Compound's liquidity pool).
In addition to Opyn and Hegic, there are ACO, Primitive Finance, Opium, Pods, etc. that provide DeFi insurance services through financial derivatives (mainly options).
3. General DeFi insurance development platform: Etherisc
Etherisc is similar to Aragon in the DAO field. It first builds a general decentralized insurance application platform (including insurance infrastructure, product templates, license-as-a-service, etc.), and then allows developers to use this platform to quickly Developed new insurance products.
Etherisc itself does not actually provide any insurance business, it just cooperates with insurance providers to help insurance providers quickly build their own insurance products.
4. The main credit default swap insurance: CDx
CDx is an open protocol on Ethereum for creating tokenized credit default swaps, using the Ethereum blockchain as its custodian, clearing and enforcement agency, rather than a centralized financial intermediary and legal system.
CDx's vision is to tokenize the CDS market in the $10 trillion traditional financial market. However, CDx's code on Github has not been updated since October 2018, and the entire project seems to exist in name only.
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Problems with DeFi insurance
With the continuous development of the entire DeFi industry, the demand for insurance for DeFi applications will increase. However, the current DeFi insurance is still in its infancy and there are many problems, such as:
1. High threshold
There are at least three barriers to using DeFi insurance products, the first being the language barrier. Most of the items listed above are in English, which makes many people who don't understand English directly lose interest.
The second threshold is the operational threshold. DeFi insurance is also a DApp application, and users need to learn to use the wallet to operate correctly. In the blockchain industry, the proportion of users with cryptocurrency wallets is not large. Most people only trade on centralized trading platforms, and have never withdrawn Token or used wallets for transfers, let alone Access third-party DApp applications through the wallet.
The third threshold is the certification threshold, which is mainly for the Nexus Mutual mentioned above. Purchasing DeFi insurance services on Nexus Mutual requires KYC certification first, but due to legal issues, it does not support identity verification for domestic users. Of course, there are many solutions for this. For example, yearn.finance has launched insurance contracts for some DeFi applications, which do not require KYC, and the underwriter is Nexus Mutual.
To sum up, language barriers, operational barriers, and certification barriers have shut out many people who have actual needs for DeFi insurance.
2. Security issues
3. Limited coverage
future outlook
For the majority of users, the most worrying thing is to encounter accidents such as stolen private keys, stolen centralized trading platforms, stolen wallets, etc., but there is currently no corresponding DeFi insurance for these.
The current DeFi insurance mainly covers the smart contract vulnerabilities of DeFi applications (such as Nexus Mutual), and uses financial derivatives to hedge against the price fluctuations of encrypted assets (such as Opyn). The scenarios and scope covered are very limited .
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future outlook
