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A sleeping giant of cryptocurrency insurance covers just 1 percent of assets.

12 Sep 2022 By: Shikha Jha
A sleeping giant of

A CEO claims that there is a huge market opportunity for cryptocurrency insurance providers given the over $2 billion lost in decentralised finance this year.

The sector is still a "sleeping behemoth," in the words of a crypto insurance executive, despite on-chain insurance having existed since 2017, covering only a pitiful 1% of all crypto investments.

The CMO of decentralised cover protocol InsurAce told reporter Dan Thomson that there is a huge difference between the total value locked (TVL) in cryptocurrency and decentralised finance (DeFi) protocolsand the percentage of the TVL that is insured.

On-chain insurance is a workable option for digital asset protection, such as in cases where a smart contract is abused or the frontend of a Web3 protocol is penetrated, notwithstanding the significant expenditure that has gone into smart contract security assessments. 

According to Thompson, the failure of Terra (LUNA) and the subsequent depeg of Terra USD serve as a classic illustration of how on-chain insurance may shield investors, with InsurAce giving $11.7 million to 155 UST victims who were impacted. Thomson emphasised the need for on-chain insurance for digital assets, stating that hacks in 2021 alone in the DeFi network alone resulted in $2.6 billion in damages, or $10 billion in the larger crypto market, and that "we're already passed that in 2022 already."

Thomson noted that while traditional corporations have expressed interest in offering crypto-focused goods, they have not yet entered the market because of their own regulations and compliance requirements.

Although capacity has slowed the development of on-chain insurance protocols, Thomson acknowledged that these protocols have also experienced some setbacks. Capacities are limited by underwriting, which is typically handled by reinsurance but is handled by stakeholder in DeFi and thus limited by TVL, making it difficult for most protocols to generate enough liquidity. He claims that the difficulty on-chain insurance providers have in providing capital providers with profitable investment returns, which discourages liquidity provision, makes this problem even worse.

There are now a few cryptocurrency exchanges that provide insurance services, however on-chain insurance is not the emphasis of many crypto-native protocols.

On-chain insurance services vary by protocol, but for the vast majority of protocols, consumers must specify the smart contract address they want coverage for as well as the amount, currency, and time period in order to receive a quote. Then, several protocols give token holders the option to use a decentralised autonomous organisation (DAO) and a token to determine whether or not a claim is true.

The other top on-chain insurance methods include Nexus Mutual and inSure DeFi.