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A detailed explanation of DeFi insurance



" Insurance is still a niche market in the DeFi ecosystem. However, as the insurance space matures and institutional players join in, insurance could become one of the biggest pillars of DeFi. "

The insurance industry is a huge market, with global written premiums totaling $6.3 trillion in 2019. The world is complex and we are always at risk of some kind of accident. Below is a simple risk management framework illustrating what we should do to address different types of risk.

Individuals should shift away from high-impact but low-frequency risks, such as natural disasters and cancer, and use insurance to deal with this type of risk.

Insurance operates on two main assumptions:

One is the law of large numbers. The loss events covered by insurance must be of low frequency, and if the event occurs frequently enough, the outcome will tend to the expected value.

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The second is the risk sharing mechanism. Loss events have the characteristics of low frequency and high impact, so the insurance premium paid by a large number of people subsidizes the loss of a small number of large claims.

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Essentially, insurance is a tool for pooling capital and socializing large losses so that participants do not go bankrupt in a catastrophic event.

Insurance socializes the cost of experiencing catastrophic events, thereby enabling individuals to take risks. It is a risk management tool that encourages more user participation, and it is crucial for the DeFi industry to go beyond existing audience segments. The DeFi industry needs insurance products to convince institutional players with large capital to join.

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However, DeFi insurance is currently in a stage of no supervisor, no supervision, no standards, and no regulations.

“DeFi insurance has many advantages over traditional financial insurance. For example, DeFi insurance is highly innovative in terms of improving privacy, fairness, asset security, reducing financial costs, and de-trusting.

However, at present, Defi insurance is mainly concentrated in the encrypted asset industry. If blockchain technology can be better coupled with the traditional financial industry, and use Defi insurance to solve the problems in the traditional insurance industry, its potential and effectiveness will be huge. "

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The financial attributes of blockchain technology have always been one of the most concerned topics. The popularity of DeFi-related industries has once again confirmed this point. The review, settlement, mortgage and other links of traditional financial business can improve security and operational efficiency in decentralized technology.

The credit system based on blockchain smart contracts penetrates the financial market and promotes its reform may be one of the future trends.

However, as a profit-seeking investment, DeFi insurance is different from common applications such as over-collateralized lending and spot trading, and requires a more stable credit market and interest rate market. Ecologically it is a challenge.

Some experts believe that a key to the future development of DeFi insurance lies in whether the target of DeFi insurance is off-chain risk or on-chain risk.

When the target of DeFi insurance is off-chain risk, DeFi insurance needs to solve two basic problems: one is that the off-chain risk is denominated in legal currency, but insurance compensation is paid with digital assets inside the chain, which causes currency mismatch problems; The actuarial calculation and insurance loss determination of external risks can only be carried out outside the chain, so it is necessary to write the relevant results into the chain through the oracle machine.

When the subject of DeFi insurance is the risk within the chain, it is necessary to expand the scope of risk coverage. In addition, although DeFi insurance actuarial calculation and insurance loss determination are technical issues, they will significantly affect the implementation of DeFi insurance because of the high requirements for professional ability.

"DeFi insurance is still in a very early stage of development, and its system construction and product innovation have just started. Excellent projects in the blockchain industry have never lacked capital to follow."

Currently restricting the development of DeFi insurance is technical factors on the one hand, and policy factors on the other. The technical factor is mainly that the openness of the DeFi contract makes the agreement easy to be hacked; the policy factor is mainly that the current DeFi insurance is still mainly limited to the assets in the digital asset chain, and the combination with traditional financial assets requires the dual support of policy and technology.

With the continuous upgrading and iteration of the DeFi protocol, the DeFi insurance market is undergoing rapid changes and gradually taking shape in terms of code quality and business model, supporting the growth of DeFi lock-up volume. At the same time, incidents of DeFi protocols being attacked and causing property losses occur frequently.

"Flash loan attack arbitrage, protocol attacks, etc. are affecting the stability of the market and the security of market participants' assets. The past year was also a year of various security incidents. Origin Protocol lost value in RMB due to re-entry attacks. 45 million yuan, Balancer’s losses due to flash loan attacks are worth 3 million yuan. In the face of endless smart contract attacks, the importance of insurance is even more prominent.

With the popularity of DeFi and the continuous participation of investors and speculators, the market competition has become more and more fierce, and the test for projects and teams has become more severe.

"In the DeFi insurance ecological chain, the DeFi project side actually occupies a lot of weight. A good insurance platform will eventually win the favor of most DeFi projects, access and establish corresponding insurance policies, and even actively update some codes Related (such as audit updates) messages.

“For a project, if it wants to stand out from many Defi projects, it must first be safe and innovative from a technical point of view, be able to differentiate from other projects and be able to solve industry pain points; secondly, the quality, diversity and activity of the ecology Sexuality, high quality and rich ecology are the key factors for the virtuous cycle of any project.”

A forward-looking leader is also the key to whether a project can be at the forefront of the industry. An excellent technical development team is the support for achieving technical feasibility, while the financing and operation team is the blood of the long-term development of the project. "Only with the above qualities Only a strong team can gain a firm foothold in the fierce competition."

Author: Xiaoxin

Editor: DXJ


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