InsurAce Protocol
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Why InsurAce.io
The driving force for an improved DeFi insurance protocol.
Decentralized Finance (DeFi), also known as 'open finance', is an ecosystem of financial applications developed on top of blockchain and distributed ledger systems. It's also referred to as 'the Lego of Finance' due to the fact that even ordinary people can use smart contracts to create a new world of finance. This new approach gives people quicker access to services and activities like payments, lending, borrowing, funding and investing. With the blooming of the DeFi ecosystem, DeFi players are creating more and more wealth and stakes. Insurance, the stabilizer of the financial system, arrives at a slower pace. According to the data from DeFi Pulse, only three notable insurance protocols are available out of the 100 major DeFi projects that are selected - Nexus Mutual, Opyn, and Augur.
Distribution of DeFi Projects
Nevertheless, the overall coverage provided by the existing insurance projects of DeFi TVL is not sufficient. According to Nexus Mutual, the peak asset value covered is US$246M, which is only around 2% of all assets across the landscape.
TVL in DeFi Covered (Jul 2019 ~ Dec 2020)
We’ve uncovered opportunities within the size of market vacancies and scarcity of successful players. After extensive research on the existing insurance products, we can now categorize them into 3 types with further comparisons listed in the table below:
- Mutual insurance, such as Nexus Mutual
- Financial derivatives, such as Opyn (convexity protocol)
- Prediction markets, such as Augur.
Element
Mutual Insurance
Prediction Market
Financial Derivative
Product
Nexus Mutual
Augur
Opyn
Capital and Liquidity
Common Capital Pool
Yes
No
No
Fully Collateralized
No
Yes
Yes (Nearly Always)
Liquidity
Customer to Pool
Two-Sided Market
Two-Sided Market
Flexibility
New Products
Low
High
High
Risk Coverage
High
High
High
Claim Assessment
Voting
Voting
Not Required
Pricing
Extreme Risk
Good
Not so good
Not so good
At the Money Risk
Not so good
Good
Good
Despite the development of existing DeFi insurance projects, we note that mutual is still the mainstream approach of most DeFi insurers. However, there are still a few common issues that need to be addressed.
Deficient Product Accessibility
There are some limitations on product accessibility for existing products, such as:
- High premium: especially for the protocols with less staked pools;
- KYC-based membership: which contradicts the free and open ethos of DeFi;
- Limited cover capacity: which often frustrates customers when they need to buy cover for their intending protocols;
- Lack of coverage for new protocols: which is often lagging behind the industry pace and unable to support the latest protocols;
- No cross-chain coverage: which limits the protection capability of DeFi protocols on other public chains;
- Lack of protection diversity: cybersecurity protection is limited when compared to the broad coverage of risk types in the traditional insurance landscape;
Inadequate Risk Management
Risk management lies at the core of any insurance business. However, current DeFi insurance products still have lots of room to enhance their risk control capabilities, such as:
- Cybersecurity: programmatic/logical flaws of Insurance protocol
- Concentration risk: the capital pool is often highly concentrated on a few major protocols, and the platform relies solely on Ethereum;
- Claim assessment: the existing claim assessment is handled grossly with a Yes/No judgment only, without quantified evaluation of the loss;
- Risk evaluation: operational, market and credit risks are not well evaluated or taken into account for the platform design and operations.
Capital Inefficiency
Capital efficiency constitutes the cornerstone of every insurance company, which benefits both the insurers and the insured systematically. However, low capital efficiency is another pain point for existing DeFi insurance products, such as:
- Low reserve utilization: the capital injected into the insurance platform is often not well managed, leading to the low utilization of the reserved fund, which has to be employed with care;
- Unsustainable investment return: Like traditional insurance businesses, customers expect to gain sustainable investment return on the money they place into the insurance company.
We have seen the market demand for more insurance projects to enhance the risk management infrastructure of the DeFi ecosystem and seek improvements to address the challenges mentioned earlier. Therefore, we propose this solution, the InsurAce.io, with core value creations.
Last modified 8mo ago