Status/problem of DeFi insurance, and the solution

0xSato
4 min readAug 9, 2021

How to make DeFi insurance a success in the booming of crypto?

TL;DR

  1. Insurace protocols should provide their limited rewards for top DEX coverages.
  2. Coverage should be based on products of DeFi protocols, not protocols as a whole.
  3. Make insurance easy. No KYC, easier understanding.
  4. Do some marketing.

DeFi overview

With crypto and Defi gaining popularity, Defi protocols such as lending platforms (Aave, Compound,Maker),DEXs (Curve,Uniswap, Sushiswap) and yield aggregators (Yearn) are booming, each with TVL (Total Value Locked) of $4 to $14 billion. TVL of all Defi protocols is $75 billion according to Defipulse, and is still in its infant stage with huge potential to grow rapidly.

TVL(Total Value Locked) of DeFi

Defi insurance overview

The most popular Defi insurance platform is Nexus Mutual, and is leading with absolute dominance. I am going to let it represent Defi insurance as of now.

Although Defi is booming, Defi insurance is lagging, with only 0.66% in Defi covered.

Defi TVL covered (%)

Which protocols are covered most?

According to Nexus Mutual, protocols with coverage over $20m(Data from nexustracker.io) are Anchor(lending),Bancor(DEX),Curve(DEX),RenVM(cross chain),Sushiswap V1(DEX) and Yearn(yield aggregator), with DEXs account for 62% of total covered of the above six protocols.

Coverage on Nexus Mutual as of Aug 9,2021 (Data from nexustracker.io)

This may be a result that lending platforms and DEXs share the most TVL in the industry.

Lending typically earns 0~8% APY, which is not good return and investors tend not to buy coverage. Coverage costs an average of 2.74%, which is a good portion of the APY earned on lending platforms. And lenders are not satisfied with the 2.74% APY of coverage. Actually it is too expensive.

DEXs are another story. Earning 30% above APY by yield farming on DEXs is not unusual. Paying 2.74% for coverage sounds reasonable.

Stable coins, on the other hand are not covered at all. This may also be a result of low APY earned with stable coins.

Based on this data, insurance protocols should provide more coverage for high APY protocols, with attractive premium.

Why is only 0.66% of DeFi covered?

3.91% APY for coverage providers on Nexus Mutual
  1. Crypto investors/speculators are with high risk tolerance level and are not the people that are willing to buy coverage.
  2. Premium is too high for coverage seekers, while APY too low for coverage providers. (premium 2.74% , staking APY 3.91%).
  3. Insurance not easy. Nexus Mutual requires KYC and this keeps some buyers out. Cover protocol(an insurance protocol) is not well introduced to users. Website homepage doesn’t try to tell potential users why they should buy coverage/how they can do it in an easy way/how much will it cost. People need to read the docs to find answers for these. And as we know, docs are long and usually not easy to understand.
  4. Lack of marketing. We can hardly see any marketing from insurance protocols. The reason might be they are not well funded and couldn’t spend the limited funds for heavy marketing.

What should insurance protocols do?

  1. Based on the above analysis, insurance protocls should put more of their funds and time in coverage for high APY protocols such as DEXs (account for 62% of coverage sold of the top 6 protocols), lending platforms and yield aggregators. If there were yield farming, limit the farming to DEXs, especially the top ones, to introduce more competition for coverage providers, thus lowering the premiums.
  2. Capital efficiency. Nexus Mutual/Cover protocol are providing coverage for DeFi protocols, which is not the best choice. For example Cover protocol provides coverage for Yearn. But in practice, an investor will only invest in 1 or several vaults(there are 50+ vaults on Yearn).If he buys coverage for Yearn as a whole, he will be over paying for his positions. Providing coverage for vaults (liquidity pools for DEXs), will make it cheaper to buy coverage. And actually, hacks/exploits happens only to one vault.
  3. Make insurance easy. No KYC please, KYC belongs to CeFi, not DeFi. Let a 9 yo understand why and how to buy coverage, in an easy way.
  4. Insurace protocols should try to balance between keeping their limited funds and marketing. No marketing at makes no sense for a product to succeed.
  5. Investor education. Defi as a whole, lending protocols/DEXs/aggregators/bridges should educate their users to buy coverage, for long term and health development for their protocols. Insurance protocols should provide work with DeFi protocols to do this job.

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