With the entry of institutional investors, can DeFi usher in an explosion in the insurance sector?

With the rise of DeFi and the accompanying myth of getting rich quickly, risks also arise.

The total amount of risk losses in the DeFi field is as high as $1 billion. Some losses may be due to design problems of the protocol itself, but apart from that, a large part of the risks are insurable.

In 2021, if nothing unexpected happens, the DeFi business will continue to grow, which may indicate that the DeFi insurance industry may explode.

DeFi business risks intensify

It is normal for DeFi business to grow exponentially. After all, smart contracts avoid the involvement of any third party and transaction costs also decrease, which stimulates user growth.

Another important point is the scalability of DeFi, which means it can be easily transformed into endless scenario applications.

But it is worth noting that the more assets there are in the DeFi ecosystem, the greater the risk of exposure.

Some time ago, hackers exploited a vulnerability in Polygon to steal more than $600 million in assets, which is considered the largest DeFi hack in history.

Polygon is not the first network to be hacked. Hackers can use the same method to steal assets from other platforms:

Yearn Finance Flash Loan — $11 million loss.

Alpha Homora Iron Bank – $37 million.

Meerkat Finance — $13 million in BUSD and 73,000 in BNB

Top 5 DeFi hacks (February 2020 to July 2021): $FARM, $SPARTA, $ALPHA, $BUNNY, $URA.

However, DeFi insurance protocols can take emergency measures to protect personal deposits and avoid the devastating effects of exploiting vulnerabilities.

DeFi ecosystem needs to be improved

As DeFi emerges and flourishes, it is also necessary to ensure long-term stability and meet our expectations for DeFi.

DeFi continues to penetrate into the mainstream financial market with its disruptive solutions, but DeFi must also continue to grow and at least have a complete ecological structure - such as insurance.

DeFi should continue to innovate and iterate like the mobile phone and automobile industries to ensure that the technology can meet actual needs.

DeFi insurance business is still in its infancy

Insurance has always been one of the important means of hedging, but data shows that the amount of insurance investors have insured for DeFi project assets is only 2% of TVL.

Considering the DeFi market size of over $100 billion, this number is negligible and inefficient capital allocation.

Overall TVL by DeFi Category

What’s more, the scale of DeFi is far from reaching its peak, so the current TVL only reflects the tip of the iceberg of the potential market.

In addition to benefiting policyholders, the DeFi insurance business also ensures the steady development of the entire industry.

Alternatives to traditional finance are urgently needed

As people increasingly recognize the huge value of data and privacy, traditional financial institutions are facing questions from users.

Moreover, a large number of users are unable to enjoy the services and products of traditional financial institutions, so the demand for alternatives to traditional financial institutions has emerged. This demand has driven the transformation of the financial market towards decentralization.

DeFi insurance meets this demand very well. It does not have the inconveniences and restrictions of modern insurance business, and the process is fair.

Reliable and accessible risk protection

If the DeFi industry wants to attract mainstream investors, it needs to have a strong risk protection plan to ensure the safety of user assets.

Especially considering that the number of institutional investors is growing significantly, the development of DeFi insurance business is particularly necessary.

in conclusion

The speed of DeFi development is not proportional to its ability to cope with this rapid growth. As the industry continues to expand, the demand for DeFi insurance is inevitable.

In other words, DeFi insurance is an industry necessity, so when will it really become a hot demand?