In this article, we’ll discuss how DI works and its benefits as well as review the main DI platforms. Curious to know more? Buckle up and continue reading!
What Is Decentralized Insurance?
Cryptocurrency is one of the most secure forms of monetary transaction in the digital marketplace that uses high-end encryption protocols to secure money transfers. But even the blockchain is not 100% secure, which is why decentralized insurance is required. DI protects against wallet and smart contract hacks.
What Is DI Protocol?
Decentralized insurance protocol is a way in which independent service providers can assess the risks or transactions without having to rely on centralized parties. DI protocols are permissionless mechanisms that can be used to price and service risk for insurance products.
Smart Contract
Smart contracts are one of the reasons companies require decentralized insurance. A smart contract is a self-executed contract with the terms of the buyer-seller agreement being written directly into lines of code. While secure, these contracts can still be hacked and require some DI.
Collateral Insurance for Crypto-Backed Loans
It’s not only conventional offline banks that offer loans. You can now take out a loan with a cryptocurrency platform and use cryptocurrency in the digital marketplace instead. To take out a crypto loan, you will need to sign up for a platform of your choice and put down some collateral. The deposit will depend on many factors, but you will still require some insurance coverage.
Crypto Wallet Insurance
If you want to trade on the cryptocurrency marketplace, you will need a crypto wallet — a digital wallet that stores your cryptocurrency. While these cryptocurrency wallets are secured using the blockchain and are virtually impenetrable, hacks are still possible. For that reason, crypto wallet insurance exists.
How Does Decentralised Finance Work?
Intermediaries are commonplace in financial transactions. However, with traditional financial transactions, you might have to pay fees to banks and financial institutions to process payments. This is not the case with DeFi. Decentralized finance eliminates intermediaries and allows merchants to transact directly.
Is DeFi High Risk?
While DeFi is a highly efficient and secure way to transact online, it’s not risk-free. It uses tokens in the liquidity pool to issue a stake that allows merchants to make payments online. However, the protocol can miscalculate the value of tokens and provide an inaccurate stake. In this case, decentralized insurance cover is useful.
What Are the Risks of DeFi?
There are three main risks associated with DeFi:
- Impermanent loss
- DeFi rug pull schemes
- Flash loan attacks
Impermanent loss refers to the losses investors undergo when the tokens are moved in the liquidity pool. A rug pull is a type of scam in cryptocurrency where crypto developers abandon a project and run away with investors’ funds. Finally, a flash loan attack is a type of DeFi attack where a cyber thief borrows a lot of funds and uses them to manipulate the market in their favor.
Decentralized Insurance Platforms
Decentralized Insurance Platforms use generic permissionless mechanisms, which allow users to build digital insurance products that are independent of centralized parties. These platforms create insurance products that are more secure and focused on specific digital products and systems.
Nexus Mutual
Nexus Mutual is an Ethereum-based platform that applies community-driven management solutions to build suitable financial products. The first product created by Nexus Mutual was Smart Contract Cover, which used to protect Smart Contracts from vulnerabilities and losses. Nexus Mutual is both a flexible and robust protocol.
Etherisc
Etherisc is another primary protocol for creating digital insurance products.
These products include:
- Crop Insurance
- Flight Delay Insurance
- Crypto-Wallet Insurance
- Social Insurance
The platform is flexible and intuitive. In addition, Etherisc can also be traded in the form of DIP. Simply open a crypto wallet to sell.
CDX
CDX stands for Credit Default Swap Index. It refers to an index of emerging market single-issuer credit default swaps. This sounds like a mouthful, but credit default swaps act like insurance policies in the financial world. CDX offers buyer protection in case of a borrower’s default. It’s also tradable and can be used in the CDS market.
Opyn
Opyn is an Ethereum-based insurance platform allowing you to buy, sell, and trade options without any third-party interference. Opyn is both trusted and permissionless. It’s an insurance platform that helps to protect your insurance products from hacks and scams and build products that are closely aligned with your goals and requirements.
In Conclusion
Decentralized insurance is available in a range of forms, with Etherisc being the most notable platform. While the blockchain is one of the most secure digital financial systems we have, it’s still vulnerable to hacks. That’s why it’s a good idea to build bespoke insurance policies.
