Are DeFi Degens in Good Hands? Insurance Companies Want to Help

Distressed crypto markets might finally give DeFi insurance a chance to flourish, but only if it can overcome some headwinds.

At the moment, less than 1% of all the assets in the $47 billion DeFi ecosystem are covered by a policy that’ll help replace them after a hack or code error. That was also true last June, in the aftermath of Terra Luna’s algorithmic stablecoin, TerraUSD, losing its peg and wiping out $40 billion in the process. For the rest of the year, and arguably even now, the effects of that black swan event worked their way through the industry, taking down other companies.

Related articles

Protocol Update: Examining Frax Finance’s “DeFi Trinity”

February 2, 2023

Meet the Top DeFi Protocols on the Aptos Blockchain

February 1, 2023

In its wake, tens of millions of dollars worth of DeFi insurance claims were filed as users tried to recoup their losses. Roughly 68% of the claims filed since June have been paid. Now that the companies selling DeFi cover, the preferred term in the industry for this type of insurance, have survived their baptism by fire, they’re optimistic about keeping the momentum going.

“DeFi cover” is a catch-all term for insurance that covers blockchain-related activity. It uses the same basic principles as traditional insurance: Policyholders pay a premium and receive a payout if and when they file a claim for a covered event. Those events are where the products really depart from traditional insurance: stablecoins losing their peg, crypto assets being stuck on a platform, hacks, or code errors causing smart contracts to behave erratically.

How and how quickly payouts happen can vary.

For something like a stablecoin losing its peg, such as when a coin designed to hold a value of $1 suddenly drops below that mark, these tools can send payment to a policyholder as soon as it detects that the stablecoin has dropped 5% or more below the value of its target asset. In other cases, like customer funds getting stuck on a company’s platform, there’s usually a 90-day waiting period before claims can be filed. For those, humans usually get involved to assess which ones are valid.

Despite all…