Thanks to the innovation of blockchain technology, cryptocurrencies and many of the applications built around them benefit from incredible security that most traditional financial products struggle to match.
This has led to the development of a huge range of decentralized finance (DeFi) products, which allow individuals and businesses to shop, invest, trade, and manage their money without relying on centralized intermediaries. For the first time, users have had full control of their money and their financial destiny. But this has a major drawback. Many users don’t want to be wholly responsible for their financial safety and are willing to cede some degree of control if it provides an additional safety net — or are simply willing to pay extra for the safety net that comes with being insured.
Until only recently, DeFi has completely lacked any insurance options to give users peace of mind when interacting with new financial products. But this is beginning to change, as a new wave of DeFi products is beginning to leverage novel insurance products to bridge this important gap.
Traditional Investors Prefer Insured Products
In the world of traditional finance, users and investors are generally accustomed to being insured when interacting with popular financial products. Ranging from the funds in their common bank account, to funds held in custody by their brokerage and online investment platforms, users are generally insured — this is often mandated by the government.
But when it comes to DeFi, this is couldn’t be any more different. Instead, users bear 100% of the risk when it comes to the security of their funds, and there is rarely an option to take out an insurance plan to protect against unforeseen events. And in an industry where potentially lucrative investment opportunities are plentiful, but as are potential scams — this doesn’t bode well for mass adoption.
But this might not be the case for much longer. With the launch of Cook Protocol, users will soon be able to gain exposure to a wide range of markets through an array of structured funds. These funds are human-managed and secured by highly transparent smart contracts, ensuring investors always know how their money is being put to work.
Cook Protocol also looks set to open up crypto investments to even the most risk-averse retail investors by working with Nexus Mutual — a crypto-specific insurance protocol — to ensure all funds handled by the platform are insured.
With insurance in place, both retail and institutional investors will have fewer friction points to adopting novel DeFi products, helping to ease the adoption of DeFi tools and providing a catalyst for further growth in the industry.
DeFi Exploits Are Still a Problem
Though DeFi has emerged as arguably one of the most promising uses for blockchain technology today and has experienced what can only be described as meteoric growth in the past few months, it has suffered from its fair share of adverse events.
Throughout 2020 alone, there was a range of attacks on DeFi protocols, these include several attacks on tokenized trading platform bZx which lost a combined $1 million in flash loan exploits. On top of this, DeFi options trading platform Opyn was exploited for $371,000 in August following a “double exercise” attack.
The second half of 2020 wasn’t much better, as a number of smaller, typically un-audited platforms suffered from a variety of attacks, many of which can be considered flash loan attacks or exit scams — whereby the team behind the project simply makes an exit with the cash contributed by users.
Until recently, DeFi users didn’t have much of a choice other than to simply bear the risks of using these platforms, acknowledging the fact that if anything goes wrong, there is unlikely to be any possibility of recourse or reimbursement.
We, the people, once held the power of insurance. And we can again thanks to blockchain technology.
— Nexus Mutual 🐢 (@NexusMutual) February 17, 2021
But with the advent of DeFi insurance protocols like Nexus Mutual, Nsure, and Etherisc, users now have the opportunity to take out insurance policies against various scenarios — ranging from smart contract exploits, flash crashes, hacks, and exit scams.
As these insurance options become increasingly woven into the DeFi, users will increasingly benefit from insured DeFi tools, products, and platforms, and will be able to navigate much of the space safe in the knowledge that should anything go wrong, they’re fully covered.
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