Constantly suffering cyber attacks that cost it billions in investor capital each year, the DeFi community had to come up with mechanisms to defend itself. Or, at least, mitigate the damage. One of these safeguards is decentralized insurance.
Decentralized insurance products typically provide complete protection of clients’ DeFi deposits, as well as hedging against risks of crypto volatility and flash crash. They also offer security against the risk of theft and attacks on crypto wallets.
Decentralized insurance companies
There are several prominent companies in the field of DeFi insurance services. They include:
This service aims to provide DeFi users with protection against smart contract risk, bridging the gap between decentralized and traditional finance. The protocol works through peer-to-peer smart contract coverage with fungible tokens, letting the market set coverage prices as opposed to a bonding curve.
The process begins with market makers depositing collateral to cover a product. For their deposit, they receive two kinds of fungible cover tokens. They can choose whether to sell them for a premium or to provide liquidity in an order-book. Coverage seekers can then purchase the insurance they require.
Another provider of smart contract insurance, Nexu Mutual uses a risk-sharing pool to create decentralized insurance on Ethereum. Its members govern this pool and the NXM token represents their membership rights.
Interested parties can purchase insurance on any public Ethereum smart contract. This provides them with the protection of their funds being lent out on Compound or Dharma or their assets deposited in a Uniswap tool. Claims are paid out on the basis of governance decisions.
While not a provider of decentralized insurance per se, Etherisc still provides risk mitigation by allowing anyone to create their own DeFi insurance products. Specifically, it is a protocol that includes product templates, common infrastructure, and insurance license-as-a-service.
The protocol’s generic permissionless mechanism allows a group of independent service providers to price, service, and transfer the risk of any kind without having to rely on centralized parties. It is currently supporting over 20 products in various stages of their development (from idea to realization), including Etherisc/Acre BIMA PIMA, HurricaneGuard.io, DAO/smart contract insurance, crypto-backed lender insurance, and more.
CDx is a new company building a smart contract protocol allowing investors to protect their assets from credit risk and trade with confidence. Specifically, it focuses on protecting crypto investors’ funds from hacks on popular exchanges.
It does this through the use of tokenized tradable insurance swaps, protecting crypto investors’ funds from hacks on popular exchanges. CDx Swaps have a range of use cases, including protecting crypto assets, trading swaps for a profit, betting against exchanges with weak security, and the like.
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All of these DeFi insurance companies are attention-worthy — there’s no doubt about it. However, they each cover only one vector of exploits or hacks, with some not even providing insurance directly (but providing tools for insurance products). Lossless, on the contrary, offers help for various types of exploits and is a lot more flexible than just insuring the investors’ assets.
The practice of providing decentralized insurance usually involves using risk pools for insurance protocols. Users have to stake the assets from their smart contracts or wallets. Lossless, on the other hand, facilitates staking on an already reported hack or for reporting the hack if you’re the first finder.
On top of that, Lossless doesn’t require you to stake your tokens for very long periods of time. That only lasts for the duration of the ongoing investigations by the Lossless Committee and the Lossless Decision-Making Body. By contrast, insurance protocols require locked staking.
With decentralized insurance companies, the potential income from their pools in case of a successful hack or exploit is very low. In Lossless, however, there are huge potential rewards if a major hack is stopped. Here’s how it works:
If a hack transaction is stopped thanks to the Lossless protocol, an estimated 7% fee is paid from it, in native tokens, and only when the hack is stopped. Native tokens are used to buy LSS tokens, distributed roughly as follows (and subject to change):
- 2% goes to the finder as the finder’s fee
- 2% is distributed to the LSS token holders that stake
- 2% goes to the Lossless Committee
- 1% is kept by the Lossless Company
Now let’s look at the situation on the ground, where hackers got away with $3.8 billion worth of DeFi assets in 2020 alone. If Lossless had a 10% market share in this market, this would’ve prevented $380 million in losses. Furthermore, the estimated 7% fee would mean a return of around $26.6 million in income for the Lossless protocol. As the hacks and the hacked amounts increase, this can only lead to larger profit opportunities.
Insurance can certainly help if a hack or exploit happens — at least to a certain degree. However, at the end of the day, someone is still going to lose assets as those who backed the smart contract usually don’t have their assets protected.
Hence, they can lose it in the hack as they cover those who lost their money in the hack. This means that two parties are at a loss here — the smart contract users and those who backed the smart contract.
Lossless, on the other hand, can stop the hack in its tracks and return 93% of the stolen assets back to its original user. The rest of the assets are deducted as a fee and distributed as described above. This isn’t something you can expect in decentralized insurance products.
Level-up your asset protection with Lossless
Despite the companies’ best efforts, decentralized insurance is still in its infancy, too risky, and not very effective at preventing large losses in hacks. Ultimately, someone will still lose their hard-earned money when hacks and exploits do happen.
Lossless overcomes this disadvantage by its unique system. It gives the participating token creators a piece of code to embed in their tokens. The community of white hat hackers and hack-spotting bots is constantly on the lookout for any questionable activity. Upon finding any suspicious transactions involving these Lossless wrapped tokens, they can freeze them by staking a certain amount of their LSS (Lossless) tokens.
If the Lossless Committee finds the hack valid, the Lossless Decision-Making Body can freeze the transaction indefinitely. The finder receives their fee, as do the other parties according to the monetization model above.
This is by far the most efficient method of hack mitigation in today’s DeFi market, the one that brings immense possibilities for profit and growth to anyone involved. So if you want to become a part of this one-of-a-kind and highly prospective ecosystem, then join us today on our: