While on-chain insurance has been around since 2017, only a measly 1% of all crypto investments are actually covered by insurance, meaning the industry remains a “sleeping giant,” according to a crypto insurance executive.
Speaking to Cointelegraph, Dan Thomson, the chief marketing o of decentralized cover protocol InsurAce said there is a massive disparity between the total value locked (TVL) in crypto and decentralized finance (DeFi) protocols and the percentage of that TVL with insurance coverage:
“DeFi insurance is a sleeping giant. With less than 1% of all crypto covered and less than 3% of DeFi, there’s a huge market opportunity still to be realized.”
Although investment has poured into smart contract security audits, on-chain insurance serves as a viable solution for digital asset protection — such as when a smart contract is exploited or the front end of a Web3 protocol is compromised.
The collapse of Terra (LUNA) — since renamed Terra Classic (LUNC) — and the resulting depeg of Terra USD provides a textbook example of how on-chain insurance can protect investors, notes Thompson, adding that InsurAce “paid out $11.7 million to 155 affected UST victims.”
“Hacks in 2021 in DeFi alone accounted for $2.6 billion in losses,” amounting to $10 billion in the wider crypto space, and “we’re way past that in 2022 already,” Thomson added, emphasizing the need for on-chain insurance for digital assets.
Discussing whether traditional insurance firms may eventually offer crypto-focused products, Thomson said while it has piqued the interest of traditional firms, they have not yet moved into the space “due to their own regulations and compliance,” adding:
“I do not believe the larger traditional insurance companies will develop their own native apps for the space, but will prefer to offer a type of reinsurance as a way of getting exposure.”
Thomson said that on-chain insurance protocols have also suffered some setbacks of their own while noting that capacity has stalled the growth of on-chain insurance protocols:
“Capacities are limited by underwriting [which is] something traditionally done with reinsurance but in DeFi it’s done by stakers and therefore limited by TVL [which makes it] hard for most protocols to build sufficient liquidity.”
This problem is exacerbated by the fact that on-chain insurance providers struggle to offer capital providers with attractive investment returns, which, in turn, discourages liquidity provision, he said.
Thomson said his firm is now looking to resolve this capital efficiency issue by utilizing reinsurance from traditional insurance firms as a means to “turbo-charge growth through the bear market,” adding:
“To fix this, we will be one of the first protocols able to bridge back to gain access to the traditional reinsurance to supplement our existing underwriting from staked assets.”
Some cryptocurrency exchanges currently provide insurance services, but very few crypto-native protocols specialize in on-chain insurance.
Related: The increasingly acute need for crypto-native insurance
On-chain insurance services vary from protocol to protocol, but most protocols require users to specify the smart contract address they want coverage for, along with the amount, currency and time period, to generate a quote.
Many protocols then use a decentralized autonomous organization (DAO) and a token to allow token holders to vote on the validity of claims.
Among the other top on-chain insurance protocols areNexus Mutual and inSure DeFi.