Launch Smart Contract Insurance Decentralized Applications | How Decentralized Finance Insurance Works?

By Suffescom Solutions

June 20, 2022

Currently, the digital world revolves around crypto like never before, with the introduction of decentralized applications powered by blockchain. The decentralized finance services offer extensive improvements like no need for intermediaries, complete transparency, and enhanced efficiency. Also, hacking attacks can cause the loss of defi assets. So, this is a new threat to the users' assets which needs some guarantee of coverage from the defi platform. 

Defi insurance offers a sense of security to the users on the defi platform. Defi insurances can be a trusted tool to protect your virtual assets. Considering all these facts mentioned above, we can say that Decentralized Insurance Platform Development is the current need of the time. So, let‘s understand what Defi insurance is, how it works, and How blockchain technology is transforming insurance.

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What is DeFi Insurance?

When we think about what could be the definition of defi insurance, then don’t make it complicated as it is nothing different but the same as regular insurance. The basic concept is also applied here: insuring yourself against the losses that can occur in the defi ecosystem due to various events.

To understand it better, we can take an example. Assume you have deposited some of your digital capital on the DefI protocol or platform. And you are very well aware of the fact that you may have to bear the losses on the Defi platform. 

Therefore, Defi insurance's role is to safeguard your locked capital. The DeFi platform user can reach the defi insurance provider for the defi assets and need to pay a certain amount to get the coverage of the lost capital on the defi platfrom.

And the cost depends on multiple different factors in defi insurance like provider, type of insurance, duration, etc. Apart from getting the Defi insurance, the Defi users need to understand deeply the different events that can cause them losses capital.

The users should know about the defi insurance plans just like the regular insurance. The defi insurance plans include insurance from the DeFi protocols attack, exchange hacks,stablecoin price crashes, etc. Moreover, you can analyze the insurance solutions for smart contract failure coverage.

Also Read: Development Of Decentralized Finance | Build DeFi Lending Platform

What Is The Role Of  Decentralized Insurance Platform Development?

The phenomenal rise of DeFi has led in a flood of institutional finance into the space. Simultaneously, the hazards of hacking, exploits, and thefts in the DeFi scene are increasing daily. As a result, DeFi insurance has become more than a requirement for many DeFi investors today. Different packages with adjustable features and variable liquid coverage are available to investors. 

In DeFi, you might think of insurance as an excellent way to hedge your bets and protect yourself from circumstances beyond your control. However, it is also necessary to consider the insurance premium's practicality in DeFi.

Many of you may be wondering if the premiums charged for the most acceptable DeFi insurance plan are reasonable. By utilizing smart contracts, the premium assists users in protecting the value of their digital assets.

 One of the most popular misconceptions about DeFi insurance is that riskier methods cost more. For the Curve Finance protocol, the premium on Nexus for insuring 10 ETH is roughly 0.1281 ETH. 

While the insurance payment appears to be a reasonable price for protecting your DeFi assets, many people are skeptical of the coverage provided by DeFi insurers. Most insurers, albeit purely discretionary, pay out for technical faults in smart contracts.

It's also worth noting that decentralized finance insurance protocols don't cover numerous vulnerabilities at different layers of a DeFi protocol. At the same time, the lack of a secondary market for exchanging insurance methods can limit their scalability.

How Will Decentralized Insurance Work?

There are basically three main components that work together to offer a safe experience o the users.

Insurance buyers

Insurer

They are those who support DeFi-related equipment or goods. They spend money on others' insurance. When a buyer pays money to purchase insurance, the money is split between these insurers.

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Insurance protocol

This party assesses and issues insurance types, which are then encoded in their system's smart contracts. Typically, these systems are DeFi applications in the insurance industry, such as 3F Mutual, Nexus Mutual, and others.

The following is how these three components will operate together: If you're an insurance buyer, for example, you put down 1ETH and buy MakerDAO system insurance at a ratio of 1:300, which means that if Maker DAO crashes, you get 300ETH, and if it doesn't, you lose 1ETH. Insurers who trust MakerDAO's long-term viability will insure it by purchasing insurance shares, for which they will receive 1ETH based on the percentage of shares they own. And the insurance procedures will organize all of your insurance actions, distribute them to the insurer, and pay you insurance if the risk occurs, among other things.

Different Covers offered In The DeFi Insurance Platform

Crypto Wallet Insurance

Crypto wallet insurance covers the insurance of your wallet and saves it from stealing and hacking. The crypto wallet controls all your funds and allows transactions, so the defi insurance lets you completely recover from your loss.

 Smart Contract Cover

Smart contracts insurance is another beneficial coverage offered under the defi smart contracts insurance covers. If the smart contract address gets hacked or funds are transferred to the other account with defi insurance, you don't need to worry about your loss as it gets insured by the Defi insurance. Users can get the funds lost from disasters.

Collateral Protection for Crypto-backed Loans

Defi insurance provides coverage for the stolen or damaged collateral deposited by the borrower. It prevents the loss of collateral deposited in exchange for receiving something. 

 What  Are the Benefits Of Decentralized Insurance?

The Defi insurance products allow total safety of the DeFi deposits. These set the boundaries against cryptocurrency crashes and fluctuations when the price goes low or high dramatically. Also, offer prevention from theft risks, attacks on the crypto wallets, and other possible DeFi risks. Therefore the users feel a sense of security when getting the Defi insurance. This is not all that users get with the defi insurance; the defi platfrom makes a complete submission, processing, claim, and the whole payment process highly secure, transparent, and reliable.

 The Benefits  Of The Smart Contracts Insurance Development

  • Instant availability of the crypto assets.
  • DeFi deposits protection
  • Safety against crypto assets volatility and sudden devaluation, and flash crashes. For example, other altcoins lose 80 to 90 % when the BTC drops 1-2K$
  • Prevent crypto wallet attacks and theft
  • Safety of the project funds on the exchanges from hacking
  • Quick payment on request
  • Technical and financial hedging
  • Full transparent and trust

You must be anxious to uncover some top insurance platforms and protocols in this industry now that you thoroughly understand the fundamentals of decentralized finance insurance and how it works. Here's the list of some of the top DeFi-related insurance projects.

Solace 

The liquidity providers are protected from the risks posed by smart contract exploits. High capital efficiency, automated claims processing, and intelligent risk assessment are essential aspects of the decentralized insurance protocol.

Nexus Mutual 

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Insure DeFi

Insure DeFi is the next extension to DeFi's insurance protocols, and it protects users' crypto portfolios with insurance. Scammers, devaluation, and stolen funds are all covered by the platform.

Bridge Mutual

Bridge Mutual, a decentralized insurance platform, is another decentralized finance insurance solution worth mentioning. Users can buy and sell insurance for various crypto assets and protocols on the platform. Most importantly, you can protect your investments against crashes, hacks, and attacks with stablecoins.

Unslashed

Unslashed is yet another high-profile DeFi insurance project now on the market. It covers a wide range of products, processes, and market segments. The platform provides insurance buyers and risk underwriters with near-instant liquidity. Furthermore, the insurance system ensures a fair claims process.

Learn About Verification of Claims in DeFi Insurance

Another important point to bring up in any discussion about DeFi insurance programs is the importance of confirming claims. Who has the authority to decide whether a claim is true? In most situations, claims the community handles verification via the DAO (Decentralized Autonomous Organization) framework. As a result, holders of native tokens can get governance rights in the insurance system and vote on claim verification. However, community voting is not always appropriate for verifying claims.

Another tried and valid method is to use oracles to verify claims in some of the best DeFi insurance packages. Oracles are essentially decentralized information methods for external data verification. You can use oracles to keep track of the outcomes of various events and disseminate the data throughout the internet. As a result, DeFi insurance protocols can reduce the chances of a claim dispute.

Final Words!!

The overall impression of DeFi insurance is that it can potentially be a significant player in the DeFi environment. Many companies have attempted to break into the DeFi space, despite grave concerns about the security of their funds. The increasing complexity and variety of hacks and attacks in the DeFi domain, on the other hand, highlights the urgent need for decentralized insurance. Decentralized finance insurance, it appears, does not rely on acquiring insurance coverage from a single person or company.
A group of liquidity providers, on the other hand, contributes capital to a decentralized pool of funds that would cover DeFi consumers. As compensation for their investment in the pool, underwriters or liquidity providers may get insurance premiums. Decentralized insurance, on the other hand, has a long way to go and many obstacles to overcome. You can learn about the dApp Development Services by connecting with our experts that have high expertise in the concerned field.

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