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Vulnerable centralized exchanges:
1. Technical risk
Server software vulnerabilities, improper configuration, DDoS attacks, server-side web program vulnerabilities (including technical vulnerabilities and business logic flaws), office computer security issues, insider attacks, etc. Many exchanges do not have disaster recovery-level system certification. Once investor data is lost in the event of a fire, earthquake, or flood, it will be beyond redemption.
2. Moral Hazard
The asset custody of the centralized exchange does not use blockchain technology, and it does not have the characteristics of non-tampering and traceability. Users need to transfer funds to a special account opened by the exchange. Users have no control over their own assets.
Centralized exchanges have opaque and asymmetric information, coupled with inconsistencies in the rights and interests of the main body, it is easy for exchange insiders to act against other investors.
3. Legal risk
Various exchanges and related personnel violated national laws, administrative regulations, and relevant market supervision department regulations in the operation of related businesses, and thus were punished by law and caused losses to the exchange.
The exchange violates the regulatory provisions and principles and incurs legal proceedings or regulatory penalties, which is not conducive to the normal operation of the exchange.
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Just Need for Insurance: Any DeFi protocol or exchange needs insurance
Ultimately, most DeFi protocols and centralized exchanges will regard insurance services as an important component of protocol services. Only in this way can the worries of users be truly solved.
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New Opportunities in the Insurance Track: DeFi Protocols and Centralized Exchanges
This future possibility means a huge opportunity for the insurance track project. In order to attract users and strengthen the moat, more and more centralized exchanges will place part of their income in the insurance market, which means an increase in insurance demand and an increase in the scale of premium income.
In addition, considering the better transparency and better liquidity of the DeFi insurance market, DeFi will have a higher penetration rate than the insurance market in traditional industries.
Let's introduce the first one for various risk events such as exchange theft, bankruptcy, and running away: exchange credit CDS insurance.
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Competitive Product Analysis Part 1: Super Liquidity of Insurance Policy ---- CDS token
Different from NXM insurance, INS3's insurance policy is an ERC777 token of the CDS concept standard, which can be traded anywhere, and customers can also withdraw the policy at any time.
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Competitive Product Analysis Part 2: Combination of Various Actuarial and Premium Models
Different from NXM's single method of linking insurance premiums with staking amounts and using staking expectations to price project default rates, INS3 uses an actuarial model that combines the expected model, KMV model, and scorecard on the independent chain to determine insurance premiums.
Let's first introduce the KMV model model.
Credit insurance premium pricing = insured amount × (risk-free interest rate + default rate). We draw on the DRSK model (a variant of the KMV model) in the mature US bond market. According to the KMV model,
Among them, V is the company's asset value, μ is the drift rate of asset value, δ is its volatility, and dW is the standard Wiener process.
Assuming that the debt period is T, the company's equity value is E, the liability is D, and the risk-free interest rate is r, according to the option pricing theory,
Calculate the default distance DD from this:
And estimate the optimal default point parameter:
Among them, α is the short-term loan multiplier, SD is the company's short-term loan, β is the long-term loan multiplier, and LD is the long-term loan.
In practice, we use the locked-up amount of DeFi and the amount of currency stored in the public hot wallet of the exchange as the debt, and the volatility of the platform currency or project governance token as the volatility to establish a mapping relationship with the current project risk.
In the simulation practice, the INS3 version of the KMV model predicted the theft of BZRX on September 13 in advance, and raised the estimated premium from 4.62% to 13.66% on the eve of the theft.
Next, let’s introduce the scorecard model. The INS3 team drew on the defiscore model to create a scorecard model for the on-chain information of each defi project:
Among them, smart contract risk weight accounts for 45%, collateral risk accounts for 20%, liquidity risk accounts for 10%, protocol management right risk accounts for 12.5%, and oracle machine risk accounts for 12.5%.
Through the scorecard, the quality of Defi projects will be more quantified and reflected in premiums.
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Competitive Product Analysis 3: Staking & NFT
If customers want to obtain stable income, they can participate in the staking of INS3 to participate in the underwriting. Unlike the 90-day mandatory pledge of NXM, the staking capital of INS3 is an NFT, which can be freely transferred on the NFT trading platform.
If you do not want to transfer, the staking capital can be withdrawn at any time when the capital adequacy ratio is sufficient. If the capital adequacy ratio is not sufficient, customers can cancel the policy and withdraw. For example, in the case of Kucoin's insurance policy, the premium increase of 321% in one day, the cancellation of the policy can also make a profit.
Participating in staking can obtain 70% of the premium share. If the leverage is 5-10 times, the annualized premium income of 15%~350% can be obtained.
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Competitive Product Analysis 4: Investment Model
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Competitive Product Analysis Part 5: Oracle
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Competitive Product Analysis 6: Summary
INS3 is more competitive: capital model, investment model, actuarial pricing model, compared with NXM and Yinsure, a major upgrade has been made in terms of decentralization and insurance coverage.
INS3 corresponds to Web3.0, continues the evolution route of traditional insurance 1.0 and Internet insurance 2.0, and brings insurance into the 3.0 era of blockchain and smart contract custody.
The tokenization of capital means that you can directly invest in "insurance companies" without resorting to financial instruments such as stocks or bonds, and can exit and trade. As a result, a "loadable" and "programmable" "insurance company" appeared, which is the progress of production relations brought about by the blockchain.
The global team of INS3, relying on technology development skills and experience in the field of actuarial insurance, has passed the audit of the Conflux Community Ecological Foundation and received funding from it. It is expected to launch the first insurance product on December 30: exchange credit CDS insurance.
INS3 hopes to bring innovation to the decentralized insurance ecosystem with the DeFi + NFT + oracle + cross-chain model.
