Comparing a decentralized insurance protocol with traditional insurance companies

While the goal of managing risk remains the same, companies operating within the decentralized finance (DeFi) space provide unique solutions compared to traditional insurers.

First things first, "decentralized insurance" does not really exist, as insurance services are carefully regulated and the insurance industry is not something you can just enter.

Instead, as a way to provide so-called "DeFi insurance" protocols protocols like us offer DeFi cover, which allows users to mitigate risks and give themselves a safety net while transacting onchain.

Let's look at some differences between what is being offered by traditional finance and what it's strengths are, and what companies like us and Nexus Mutual offer, and how that also serves investors.

Are traditional firms providing DeFi insurance?

Not really, no.

They are offering insurance products related to blockchain technology, but they focus on off-chain risk, like custody, kidnapping and ransom, and regulatory uncertainty.

Policies are available to big, institutional clients, not to retail, and do not offer protection against onchain risks. The insurance policies are also managed offchain, and follow traditional insurance processes.

Traditional insurance platforms are not offering onchain DeFi insurance.

The DeFi ecosystem needs risk management solutions

That doesn't mean that retail or onchain DeFi users have no options.

Unlike traditional insurance which still takes place off chain, protocols like OpenCover and our partners Nexus Mutual are offering an equivalent to DeFi insurance, taking place onchain, through smart contracts, and dealing with issues the centralized entities are not addressing.

It is worth noting that strictly speaking, "blockchain insurance" or "DeFi insurance" doesn't exist. "Insurance" is a specific term referring to a highly regulated space.

What we do is defined as "risk transfer" or "providing cover".

How we provide cover for DeFi protocols

What we offer is an elegant solution to the lack of decentralized insurance.

Firstly, everything is done using blockchain technology through smart contracts. From the moment you purchase insurance aka cover to when you enter the claims process, everything is done transparently onchain.

We offer comprehensive coverage, with our two most popular products being Protocol Cover and Depeg Cover, both of which protect your digital assets, but in different ways.

Protocol cover protect against the leading onchain risks:

• Protocol hacks
• Oracle manipulation
• Liquidation failures
• Governance attacks

Depeg cover protects against stablecoins or wrapped crypto assets losing their peg. If you have a dollar pegged stablecoin. Some of the biggest stablecoins around have lost their peg and smart contract exploits are all too common, so these risks are very real.

What about the claims process?

We process claims quickly and efficiently.

If a covered event occurs, we have a simple form for you to fill out. From there we will double check everything to prevent false claims, and reach out if we have any questions. Leveraging blockchain technology, we can easily check the validity of your claim.

We handle claims quickly, and pay out as soon as possible. We recently paid out to two cover claims related to the Arcadia Finance hack.

TLDR: DeFi insurance providers offer a new solution

DeFi insurance doesn't exist per se as insurance is a specifically regulated industry. But, an onchain equivalent does exist, allowing you to transfer risk when engaging with decentralized platforms and digital assets.

Protocols like OpenCover and Nexus Mutual provide a decentralized insurance-like service, that uses smart contracts to provide coverage in a decentralized manner.

As more people adopt blockchain technology, the need for this type of service is only going to increase.

Standard insurers do offer insurance for cryptocurrnecy, but they focus on offchain risks, like custody or regulations rather than onchain issues like smart contract vulnerabilities or stablecoin depegs.

They do not offer consumer protection to retail and their services are for institutions.