Speaking with data: How should the insurance cost of DeFi projects be priced?

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The average DeFi insurance cost is priced around 2.6%, while the reasonable price of blue-chip project insurance is around 2%.

Original title: “Looking for a reasonable premium for DeFi insurance”
Written by: ChinaDeFi

If you are in DeFi, how much do you expect to lose?

Let us consider the hacking/vulnerability exploits throughout 2020. For the sake of simplicity, we only consider the main factors.

As of 2020, there have been 20 hacking/vulnerabilities, causing a total of 24 million USD in losses. TVL (total lock-in value) by the end of 2020 is $156 million.

In 2020, 2.03% of DeFi loss, and an average loss of 4.6% of TVL for each attacked protocol

For the sake of simplicity, suppose we think that Alice is the only investor in DeFi, and she invested $156 million in DeFi in 2020. Due to hacking, she lost $24 million in 2020.

Alice’s loss rate is 24 million U.S. dollars / 156 million U.S. dollars = 2%

what does this mean?

This means that if you invest $100 in DeFi, you are expected to lose $2 for the whole year.

If a protocol is hacked/utilized, how much will it lose?

As shown in the figure above, the TVL loss of 11 projects is as high as 30%, with an average of 4.6%.

This means that if your DeFi project is hacked, you will lose 4.6%.

What can you do to ensure the safety of your funds in DeFi and have a good sleep?

purchase insurance.

What is the average DeFi insurance cost?

In order for an insurance company to make a profit, the premium must include the expected loss, which is 2%. Let us give a reasonable figure of 2.6%.

But 2.6% is an average level. We all know that the quality of the project is different based on the team, history, and user base. Blue chip projects should be safer and pay less than 2.6%, while new small projects should pay much higher than 2.6%.

We cannot estimate low premiums for small and new projects, because the risks can be high. But it must be higher than 2.6%.

What should the insurance cost of a blue chip project be?

For blue chip projects, this ratio should be less than 2.6%, because they are safer than normal DeFi projects.

What determines the insurance premium?

The loss rate of blue chip projects?

Balancer, Compound, and Year lost 0.3% (US$400,000/US$128 million), 6% (US$90 million/US$163 million), and 1.2% (US$11 million/US$900 million), respectively, in the hacking attack, with an average loss 3.8%.

Speaking with data: How should the insurance cost of DeFi projects be priced? Blue chip projects lost an average of 3.8% during the hack

As mentioned earlier, the average DeFi project is expected to lose 4.6%.

What should the premium of the blue chip project be?

If we do not consider the possibility of the project being hacked, the premium should be (3.8%/4.6%) * 2.6%=2.1%.

Therefore, considering the possibility of being hacked/exploited, it can be safely said that a premium of 2% for blue chip project coverage is fair.

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