Insurance has been a missing fundamental building block in the DeFi ecosystem for a while now. The absence of liquid insurance markets for DeFi protocols hampers the growth of the development of the ecosystem and blocks more capital from being immersed in it.
Insurance provides investors much-needed confidence to participate in the DeFi market by distributing the cost of calamitous events. If there were no protection against the risks we face in life, people would be more prudent. However, the easy accessibility of DeFi insurance coverage has encouraged investors to make significant capital outlays in nascent financial markets.
DeFi Insurance Models
Nexus is a people-powered alternative for insurance built on Ethereum smart contracts. The platform offers mutual coverage solutions with clearly stipulated terms and conditions for decentralized finance protocols. All funds are community-backed, and its mutual community members verify the validity of a claim.
Members can contribute Ether (ETH) into the pool in return for NXM, Nexus Mutual’s native token. The mutual is fully owned by its policy members. Their insurance model is a risk-sharing pool, allowing individuals to purchase insurance and contribute capital.
Nexus has no insurance policies that protect against natural disasters, nor do they provide benefits related specifically to disabilities sustained from traffic accidents involving vehicles. Instead, they solely focus on providing cover for smart contract failure.
Bridge Mutual describes its protocol as a decentralized, discretionary coverage platform. It allows coverage protection for smart contracts, stablecoins, and exchanges in return for yields and profit-sharing. Bridge Mutual enables other users to purchase coverage policies against the same coverage policies for stablecoins and smart contracts. The platform's users decide on claim payouts and receive compensation for participating in the ecosystem.
Users seeking coverage can use Bridge Mutual platform to generate a quote and purchase insurance for smart contracts, stablecoins, or exchanges. Quotes are generated on-chain through an actuarial formula that takes into account each contract's risks accordingly.
Cover Protocol: P2P marketplace
Before their unfortunate closing of operations, Cover Protocol’s insurance model protected against flaws in smart contracts and allowed market forces to determine the cost of coverage in preference to bonding curves. In addition, the cover provides coverage of P2P marketplaces through its fungible COVER tokens.
The members of these P2P insurance models contribute their premiums in an escrow-like account for claims pay-out instead of the conventional premium system. In this model, none of the members contributes more than the risks they are likely to face, and if no claim is made, the digital assets contributed remain untouched.
Barnbridge: Risk hedging through derivatives
Some projects have combined the blueprints of all these models to develop prediction markets or derivatives marketplaces, both of which can serve as a sort of insurance contract. In the case of the derivatives market, short selling allows traders to hedge the price of digital assets via a free market.
By their standards, futures contracts protect cryptocurrency investors against pure price risks through amortizations if the spot price drops below the option price at expiry. This covers all the reasons that may cause a cryptocurrency price to drop, which include malicious attacks. Thus, both the predictions market and futures contract are exploring the option of insurance as a utility.
Steady State: Coverage Pools & Index Pools
Similar to traditional finance, DeFi coverage platforms are attributed to pooling, transfer, and distributing risks. The fundamental factor driving these DeFi insurance models is the underwriters contributing funds to these pools for each covered protocol. In return, get rewarded with the protocol's native token. In most cases, these tokens grant the holders or, in this case, the liquidity providers governance or voting rights.
The advantages of these coverage pools are evident for the users - they get to protect the value of their investment against smart contract flaws. But, as expected, the riskier a protocol might be, the higher the number of premiums they are expected to pay. Examples of coverage pool models include Unslashed and Steady State.
How does Steady State work?
Steady State is an automated, smart contract-based "direct-to-protocol insurance model for DeFi and the cryptocurrency ecosystem to protect platforms against systemic risks while rewarding users. The marketplace aims to simplify and strengthen cryptocurrency platforms and protocols and their markets by providing comprehensive insurance coverage through automated smart contracts and data analysis that removes bias, increases efficiency, and ensures immutable claims processing.
Protocols are covered directly with liquidity-backed coverage pools in which DeFi users can stake their assets for rewards. Protocols must reach a consensus to open a coverage pool, but anyone can stake assets once they're created.
Steady State’s index pools provide optimal coverage. Policyholders band together coverage pools to share risk and collateral -reducing their premium, magnifying their collateralization and mitigating downside risk. Index pools shield coverage providers from the impact of potentially devastating tail risk by spreading their collateral across multiple policies.
About Steady State
Steady State gives DeFi protocols and platforms a practical solution to safeguard their financial future. With the help of Chainlink Keeper technology, our platform aims to eliminate bottlenecks in DeFi insurance by using automated processes, shared coverage policies, and a cutting-edge risk analysis database. Steady State is creating a new paradigm for decentralized insurance by delivering DeFi’s best-ever insurance platform for protocols.
To learn more about Steady State and the impact of our pragmatic approach to Defi insurance, visit us at the links below:
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Steady State cautions that statements in this communication that are forward-looking, and provide information other than historical information, involve risks, contingencies and uncertainties that may impact actual results of operations and prospective transactions.