Why InsurAce.io

A driving force for improved protection.

Decentralized Finance (DeFi), also known as 'open finance', is an ecosystem of financial applications developed on top of blockchain and distributed ledger systems. It is also known as 'the Lego of Finance' where different smart contracts work together to create financial products, giving users faster and better access to financial services such as payments, lending, borrowing, funding, and investing. DeFi, along with TVL, has grown exponentially and is now home to billions in capital and savings in general. However, the development of key protocols for securing and stabilizing this burgeoning DeFi ecosystem has not caught up with the pace of progress in the space. For instance, at peak DeFi TVL of around $185.88B on 2nd December 2021 based on DefiLlama's data, Nexus Mutual being one of the largest players out of only 20 cover providers actively covered just 0.39% of total market-wide TVL.

Several protocols have been built with largely differing solutions to address the massive disparity between TVL and coverage. They include mutual protection, financial derivatives, and prediction markets. So far, mutual protection has remained the most dominant and effective approach to DeFi coverage. However, current offerings for mutual protection still have much room for improvement in terms of product accessibility, risk management, and capital efficiency.

Deficient Product Accessibility

There are some limitations on product accessibility for existing products, such as:

  • High prices: Especially for protocols with less staked pools.

  • Limited cover capacity: Often frustrates customers when they need to buy cover for their intending protocols.

  • Lack of coverage for new protocols: Often lags behind the industry's pace of development, being unable to support the latest protocols.

  • No cross-chain coverage: Limited protection for users of DeFi protocols on other public chains.

  • Lack of protection diversity: Availability of cybersecurity protection is limited when compared to the broad coverage of risk types in the traditional landscape.

Inadequate Risk Management

Risk management lies at the core of any business. However, current DeFi cover providers still have lots of room to improve their risk control capabilities, such as:

  • Cybersecurity: Programmatic/logical flaws of cover providers.

  • Concentration risk: Capital pools are 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

Maximizing capital efficiency is critical to the success of all cover providers. However, low capital efficiency continues to plague DeFi cover products, such as:

  • Low reserve utilization: Capital injected into cover protocols are often not fully utilized due to the need to deploy them with care given the cover provider's obligations.

  • Unsustainable investment return: Token emissions may help bootstrap liquidity during a protocol's initial stages of development, especially during a bull run, but more sustainable methods of generating returns is required to ensure the InsurAce protocol remains adequately capitalized.

There is much demand from users for a robust DeFi risk management infrastructure which addresses all the issues outlined above, and which InsurAce.io seeks to address.

Last updated