What is insurance in crypto?
![What is insurance in crypto?](https://blog.cer.live/wp-content/uploads/2022/07/What-is-insurance-in-crypto_-768x432.jpg)
Two years ago, very few people cared about insurance in crypto. Now, it is a critical element of a project’s cybersecurity. This article presents reasons why you should pay attention to whether a project has an insurance fund.
Why is insurance important in crypto?
Insurance is the last defense against losses due to breaches in cybersecurity or stablecoin de-peg. Insurance is the only way to mitigate risks completely. The goal is to guarantee that the insurer will recover investors’ damages due to cyberattacks and other threats.
For years, the insurance industry has been on the sidelines of Web3.0 as there wasn’t enough demand for this service. As more mainstream investors commit to crypto, they seek ways to protect their financial assets. Insurance in crypto has two main functions. Firstly, it mitigates damages from cyberattacks, such as smart contract exploits. Secondly, it protects against volatility caused by stablecoin de-pegging.
Mitigating Cybersecurity Risks
New and established crypto projects lose billions to hacks, scams, and exploits. Indeed, let’s not forget about the ever-increasing cybersecurity threats in Web3.0. According to Dam Thomson, CMO at InsurAce Protocol, the number of hacks is rising. In 2020, DeFi lost $129M due to hacks. The figure increased to $1.3B in 2021. We have already passed that this year. DeFi protocols alone lost almost $2B to hackers and scammers in the past 12 months. Dam Thomson argues that hacks can happen to great teams with good audits and bug bounties. These all create the need to protect one’s digital assets against the risks.
Volatility Hedging
Enthusiasts love crypto because it’s peer-to-peer, public, and decentralized. Yet, the crypto industry is subject to higher volatility than traditional financial markets. Volatility and speculation may lead to price bubbles that suddenly pop. Stablecoins get derailed too. Remember the violent collapse of Luna and Terra or previous large-scale incidents with Saddle Finance and Elephant Money. The ongoing bitcoin crash is another example of high volatility. Crypto day traders and long-term investors have to hedge their positions against the risks of price fluctuations caused by de-pegging.
Insurance in crypto is used to cover the risks of smart contract vulnerability, stablecoin de-peg, custodian risk, and IDO event.
How it works: Decentralized insurance for decentralized finance
In Web3.0, insurance is decentralized. Stakers in the insurance protocol act as underwriters. They provide capital to the shared pool and receive a return on their stake. The pool is distributed among DeFi protocols and stablecoins to cover the damages when an insurance case occurs.
Crypto insurance in steps
- The Web3 project chooses its insurance provider. The crypto market has insurers of all kinds and sizes.
- The company decides how much money to allocate to insurance. Web3 projects determine what share of their stored/locked balances to put into insurance coverage.
- Stake a premium amount and submit a claim request. The claim request is submitted after your portfolio was affected by a hack, scam, or drastic devaluation.
- Receive reimbursement for losses. The insurer assesses the claim and fulfills insurance claims.
Top 5 Crypto Insurance Providers
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Who needs and who has insurance?
Crypto projects that use smart contracts to lock funds require insurance because they are exposed to smart contract vulnerability. DeFi, tokens, and platforms all need insurance as opposed to blockchains and wallets. Most crypto exchanges do not have insurance because their capacity is limited. Yet, this will change in the future as insurance providers rethink their approach to crypto.
Use CER to find out projects with insurance
We provide cybersecurity rankings for DeFi, crypto exchanges, tokens, wallets, blockchains, and platforms. Our diligent researchers and white hat hackers analyze 18 key indicators to conduct security reviews and assessments. Insurance is one of the indicators. We identify whether the project has insurance, look up their insurance provider, and estimate the size of an insurance fund to come up with an objective assessment of the project’s cybersecurity in terms of insurance.
Our methodology is consistent across projects. Platforms and DeFi projects with more than 10% of stored/locked balances or more than $50M in insurance coverage receive the most points, whereas projects with less than $1M do not receive points at all. We pay attention to all these factors so you can check if your shortlisted project has a credible insurance fund.
Our database shows that only 97 of 1521 top crypto projects have insurance. The biggest DeFi, tokens, and platforms with insurance are Lido Staked Ether, Dai, Crypto.com Token, Uniswap, and Aave.
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Investors need to know whether projects take their cybersecurity seriously. With rising hacks, scams, and exploits, crypto insurance is a great indicator of a project’s credibility and safety.