Crypto insurance a ‘sleeping giant’ with only 1% of investments covered

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While on-chain insurance has been around since 2017, only a meager 1% of all crypto investments are actually covered by insurance, meaning the industry remains a “sleeping giant,” according to one crypto insurance executive.

Speaking to TBEN, Dan Thomson, the CMO of decentralized coverage protocol InsurAce, said there is a huge difference between the total value locked in (TVL) in crypto and decentralized financial (DeFi) protocols and the percentage of that TVL with insurance coverage:

“DeFi insurance is a sleeping giant. With less than 1% of all cryptocurrencies and less than 3% of DeFi, there is still a huge market opportunity to be realized.”

While much has been invested in smart contract security audits, on-chain insurance serves as a viable solution for protecting digital assets, such as when a smart contract is exploited or the front-end of a Web3 protocol is compromised.

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The collapse of Terra (LUNA) and the resulting depeg of Terra USD provides a textbook example of how on-chain insurance can protect investors, Thompson notes, adding that InsurAce “paid out $11.7 million to 155 affected UST victims. ”

“Hacks in 2021 in DeFi alone accounted for $2.6 billion in losses,” which equates to $10 billion in the broader crypto space, and “we are well past that by 2022,” Thomson added, and emphasized the need for on-chain insurance for digital assets.

Discussing whether traditional insurance companies could eventually offer crypto-focused products, Thomson said that while it has sparked the interest of traditional companies, they have not yet moved “because of their own regulations and compliance,” adding:

“I don’t believe the larger traditional insurance companies will develop their own native apps for the space, but will prefer to offer some sort of reinsurance as a way to gain exposure.”

However, Thomson said that on-chain insurance protocols have also suffered some setbacks, noting that capacity has stalled the growth of on-chain insurance protocols:

“Capacities are limited by acceptance” [which is] something traditionally done with reinsurance, but in DeFi it is done by strikers and therefore restricted by TVL [which makes it] difficult for most protocols to build sufficient liquidity.”

This problem is exacerbated by the fact that on-chain insurers struggle to provide lenders with attractive investment returns, which in turn discourages the supply of liquidity, he said.

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Thomson said his company is now looking to solve this capital efficiency problem by using reinsurance from traditional insurance companies as a means of adding “turbo growth through the bear market”:

“To resolve this, we will be one of the first protocols that can bridge the gap to access traditional reinsurance to complement our existing underwriting of deposited assets.”

Some cryptocurrency exchanges currently offer insurance services, but very few crypto-native protocols specialize in on-chain insurance.

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Related: The increasingly acute need for crypto-native insurance

On-chain insurance services vary from protocol to protocol, but most protocols require users to provide the smart contract address they want coverage for, along with the amount, currency, and time period in order to generate a quote.

Many protocols then use a decentralized autonomous organization (DAO) and a token to allow token holders to vote on the validity of claims.

Other top-on-chain insurance protocols include Nexus Mutual and inSure DeFi.