Decentralized finance (DeFi) investors suffer losses weekly due to technological weaknesses and economic vulnerabilities. It's time to start thinking about web3 insurance. Digital assets' value increased from $5 billion in 2015 to almost $1 trillion in 2022. The Web3 economy has tremendous promise but needs to be more insured. Currently, less than 1% of digital assets are insured, which creates a perfect opportunity for insurance to fill the gap. Web3 native insurance, such as Nexus Mutual, provides $400 million in coverage; they understand what is essential. But that's not enough. 

Insurance is necessary for Web3 adoption and the protection of crypto holdings. It should enhance customer trust and protect against risks like exchange failures, cyber-attacks, and lost or stolen wallet keys.

What is web3 insurance?

Web3 insurance is a protection against dangers specific to the blockchain ecosystem. Exchange hacks, DeFi protocol assaults, smart contract failures, stablecoin price declines, and so on are examples of this. If a policyholder files a claim for a covered incident, they will get a reimbursement. A group of investors often combines funds to offer coverage to DeFi customers, providing a safety net for unforeseen losses and making DeFi more secure and appealing to investors.

Using DeFi to secure DeFi is a no-brainer since it lowers dependency on centralized authorities and intermediaries and makes transferring and verifying information more accessible. Oracles can automate claims evaluation, increasing operational efficiency. 

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Related Article: The Critical Role Of DeFi Insurance After Smart Contract Auditing

Claim Verification

DeFi insurance relies on a community-approved claims process achieved through Decentralized Autonomous Organization (DAO) structures, where token holders with governance rights can vote on claims. Expert committees also analyze claims, but oracles may sometimes automatically approve or reject claims. Oracles verify external data for DeFi insurance to prevent disputes and ensure dependability online.

What DeFi insurance covers 

DeFi insurance protects users against various risks within the DeFi ecosystem. These risks include but are not limited to the following:

Yield Token: Yield Token Cover safeguards against losses arising from the value differences of yield-bearing tokens.

Protocol: This protects protocols against losses resulting from DeFi risks, such as smart contract exploits, hacks, oracle manipulation, and governance attacks.

Stablecoin Depeg: Depeg Cover ensures that users receive the intended amount of currency by protecting against stablecoin losses due to peg loss.

Rug Pull: This is a situation where the deployer drains funds intentionally.

When purchasing insurance, the amount you pay will depend on the type of coverage, duration, and events you want to cover. Like regular insurance, insurance buyers must decide which events to cover.

More on Web3 Insurance: How DeFi Insurance Pools Work

Benefits of DeFi Insurance

DeFi insurance is a type of coverage designed to protect users and investors against various risks within the DeFi ecosystem. 

• DeFi Insurance operates on a decentralized platform that utilizes smart contracts to automate claims, unlike traditional insurance policies. This results in policies that are often more cost-effective than their traditional counterparts, making them an attractive option for those looking to minimize their expenses.
• One of the most important advantages of DeFi insurance is that claims are handled fairly and openly by a decentralized community of investors. This community can vote on claims and guarantee they are handled fairly for all parties concerned. In traditional insurance, their claim handling could be more transparent, and it often takes months before a payout. 
• Another benefit of DeFi insurance is obtaining coverage for specific protocols or projects. This enables them to adapt their coverage to their needs and reduce risk exposure.
• Overall, DeFi insurance provides various benefits to DeFi ecosystem users and investors. It has the potential to minimize risk, promote transparency, and make investments more accessible to a wider variety of people.

Challenges of DeFi Insurance

DeFi insurance has great customer potential, but certain crucial issues must be tackled before it can be widely used and effective.

• The lack of legislative certainty is a significant barrier, making it difficult for insurance companies to operate inside the DeFi ecosystem. 
• Another area for improvement is the restricted coverage options, which may necessitate consumers purchasing numerous plans to secure their valuables completely. Furthermore, due to the cryptocurrency market's volatility, proper pricing policies might be complicated. 
• The low liquidity of DeFi insurance plans in smart contracts is another cause for concern. 
• Finally, the complexity of the DeFi ecosystem might make it difficult for users to appreciate the risks and advantages of various insurance packages properly.

Conclusion

DeFi insurance products are designed to offer protection from risks unique to specific protocols or tokens. However, it is essential to note that DeFi insurance is not currently recognized as formal insurance by regulatory bodies. Despite this, many protocols are developing innovative strategies to protect their users' assets.