What Is Decentralized Insurance?

Decentralized insurance is a DeFi service that uses blockchain-powered smart contracts to protect users from financial risks.

The importance of insurance can’t be stressed enough, especially in the highly erratic crypto environment. Smart contract exploits, wallet attacks, flash crashes, and black swan events are growing with the number of dApps and tokens spawned into the market. Crypto insurance companies can go a long way in encouraging more people to adopt blockchain technology. 

That is not to say the application of decentralized insurance is limited to the crypto market. The losses covered could pertain to the real world too, from flight delays to healthcare and natural disasters. Blockchain-run contracts open up the insurance market that has for long been bound by the red tape, eliminating paperwork and middlemen. 

Summary of Important Points 

  • Decentralized insurance provides financial coverage for predefined losses using blockchain technology. 
  • It is used for the protection of DeFi deposits, crypto investments, and real-world assets. 
  • If you buy coverage from a company in TradFi, here, you buy it from a decentralized insurance pool. 
  • You can become a coverage provider by staking tokens in an insurance pool of your choice. 
  • The claims are mostly verified by the DeFi communities through voting.
  • Some of the leading platforms that offer decentralized insurance are Nexus Mutual, Etherisc, InsurAce, and Unslashed. 
  • Decentralized insurance contracts are not yet legally enforceable.

What Platforms Support Decentralized Insurance?

Listed below are some of the popular decentralized insurance platforms. 

1. Nexus Mutual 

Nexus Mutual calls itself the “people-powered alternative to insurance”. The Ethereum-based crypto insurance company allows people to share risks without relying on an insurance company. It promises to add an additional layer of security against smart contract failure and exchange hacks. 

Nexus Mutual DAO is powered by NXM tokens. You can use them to buy covers, vote for or against claims, and participate in underwriting and governance. 

2. Insure DeFi 

Insure DeFi doesn’t limit its services to smart contract insurance. It protects investors from scams, stolen funds, and the drastic devaluation of crypto portfolios. In addition, it offers NFT insurance.

The platform uses Chainlink’s historical data to calculate VIX and ATR volatility indexes. You can enable your insurance coverage by locking up Insure DeFi coin $SURE in the community vault for at least seven days. 

3. InsurAce 

InsurAce is a multi-chain insurance protocol that protects up to 123 protocols on 19 public blockchains. It covers smart contract, custodian, IDO, and stablecoin depeg risks. In the future, it plans to offer NFT insurance and cross-chain covers as well. 

Since the plans are portfolio-based or bundled with unique pricing strategies, it saves you from signing up for multiple coverages. 

4. Etherisc

Etherisc is a decentralized insurance protocol to collectively build insurance products. As a result, it offers a wide range of insurance products for the crypto market as well as the real world. 

Crop insurance, flight delay insurance, hurricane protection, crypto wallet protection, and crypto life insurance to name a few.

Why Is Decentralized Insurance So Important Today?

As events like the DAO hack or Parity multi-sig wallet attack prove, even credible crypto projects are not immune to risks. Decentralized insurance is indispensable if the blockchain industry is to scale sustainable growth. It can revitalize the traditional insurance market too. 

Let’s see how. 

  • A significant share of the insurance premium goes towards paperwork and administration. Verification and settlement of claims demand a lot of time, money, and human resources. Blockchain protocols can cut these down through automation. 
  • In decentralized insurance, you are buying coverage from a decentralized community rather than an insurance company. Anybody can sign up to provide coverage by staking their funds in a DeFi insurance protocol.
  • The platforms often have a list of coverage pools participants can choose from.  When you buy coverage from a decentralized insurance protocol, you buy them in crypto tokens. That is more of an investment rather than an expense. Most platforms offer rewards on staked tokens as well. 
  • The poor, who are in most need of insurance, are out of the purview of the traditional insurance market. Since they are more prone to vulnerabilities and have fewer resources per person, it doesn’t make sense to cover them. With lower barriers to entry, DeFi can bring insurance to people living in the peripheries. 

Crypto insurance companies offer a hedge against crypto volatility. However, it is important to note that decentralized insurance protocols are not legally enforceable. They are also bound to the inherent risks of DeFi.