Crypto investors and exchanges have lost billions of dollars due to hacks and breaches. Besides hacking, events like the Terra Luna fiasco magnify the risks involved in crypto investment. According to a report, over $2 billion have been lost due to crypto hacks in 2022 so far, a 37% increase from 2021. The rise in incidents of crypto hacks amid the increasing adoption of DeFi is a major concern for all stakeholders. This makes a strong case for the adoption of on-chain crypto insurance.
In an interview with Cointelegraph, Dan Thomson, the CMO of decentralized cover protocol InsurAce said, “DeFi insurance is a sleeping giant. With less than 1% of all crypto covered and less than 3% of DeFi, there’s a huge market opportunity still to be realized.” On-chain crypto insurance emerges as a more reliable solution for the security of digital assets in comparison to security audits.
What Is On-Chain Crypto Insurance?
On-chain crypto insurance aims to provide coverage against risks involved in the continuously rising crypto and DeFi sector. With the crypto industry set to reclaim its $1-trillion market cap and leading institutions adopting DeFi, the importance of covering risks in the industry is paramount. While on-chain insurance is still an emerging concept, it could be game-changing, with the adoption of DeFi solutions skyrocketing.
The Need For On-Chain Insurance?
With the existing security arrangements failing to prevent events involving siphoning off of crypto assets, the industry needs a well-established coverage system to minimize the risks. Surprisingly, on-chain insurance covers only 1% of the crypto market and only 3% of the entire DeFi market as of now. This pretty much explains the growth potential of On-chain crypto insurance.
Now we know why Mr. Thomson calls it a sleeping giant. Imagine it covering even 30% of the crypto market. It is only a matter of time before crypto reclaims the $1 trillion market cap once again. Once it happens, we might see a flurry of all-time highs across the digital asset bandwagon.
Limited Capacity Stalling Growth
In his interview with Cointelegraph, Dan Thomson identified limited capacity as a key reason behind the stalled growth of on-chain crypto insurance. Moreover, insurance providers have failed to provide capital providers with impressive returns. “Capacities are limited by underwriting [which is] something traditionally done with reinsurance, but in DeFi, it’s done by stakers and therefore limited by TVL [which makes it] hard for most protocols to build sufficient liquidity,” Dan said in a statement.
While some cryptocurrency exchanges offer insurance cover services, they lack the expertise of on-chain insurance. This paves the way for the emergence of specialized insurance cover providers. The services of different insurance providers may differ from one another, but the on-chain crypto insurance may unfold as a revolution, minimizing the risks associated with DeFi protocols substantially.