The insurance market in DeFi is not only not to be ignored, but also extremely large.
Chainlink brings a credible and decentralized real token price to the DeFi market, and the total market value of its token LINK is also positively correlated with the total market value of the currency in DeFi. In other words, the oracle market has played an extremely important position in DeFi, because it protects many users from arbitrage and manipulation of property losses.
However, it is not very comprehensive to protect users from the aspect of arbitrage. At present, many smart contracts have many loopholes in the design. Either the contract is technically attacked, or the price is manipulated economically (such as lightning loans). This type of attack is simply a big prize like holding YFI, but this is an irony.
Therefore, in 2018, when the scale of DeFi was still very small, some people began to make efforts in DeFi insurance. So far, insurance is a very large branch of DeFi, which not only supports individual users to insure, but also supports projects to insure. Because DeFi’s contract logic is too complicated, most people can’t have the IQ to design the protocol perfectly, so it is completely fine to think that DeFi’s contract logic “has a certain probability of being attacked”. As long as there is a probability of loss, insurance business will inevitably come in. It can be said that the insurance market is as big as the DeFI market is.
However, unlike the traditional centralized and strictly regulated insurance industry, DeFi insurance based on smart contracts has a completely different gameplay. We can finally witness: code + economics determines everything.
There are many DeFi insurance items, but no matter how you talk about it, it is difficult to avoid discussing Nexus mutral and Cover. This article first discusses Nexus mutral.
Nexus mutral
The design of Nexus Mutral is more interesting. Its original intention was to restore the insurance wisdom from Eastern civilization more than 2,000 years ago:
According to legend, in China more than 2,000 years ago, merchants often needed to transport goods by water, but that would easily cause the ship to capsize and all his goods would be lost. Therefore, people thought of a way that many merchants would unite and ship the goods together. If 10 merchants shipped the goods together, then everyone’s ship would carry 1/10 of the cargo of 10 individuals. For a ship, only the owner loses 1/10 of his cargo, which is obviously the best way for all.
This is the oldest way to spread risk through collective power. However, because the number of people that can be connected in this way is too limited (for example, dozens of businessmen who know each other), this insurance model is difficult to scale, and this has led to the Western centralized insurance system. However, this system now exposes some problems: information asymmetry, high cost of persuading a person to apply for insurance, high regulatory pressure, only a portion of insurance claims, high business costs (friction costs), etc.
However, some fans of decentralization have discovered that the decentralization of the blockchain network can return insurance to the form of China before 2000—that is, to break the centralized insurance pattern and let all Insurance participants all take risks through stake and earn profits. Through the design of economic models, people are encouraged to be more willing to participate in the agreement, which eliminates information asymmetry and greatly reduces regulatory pressure. In other words, it is the mutual fund insurance in DeFi.
As its founder said:
It allows the cooperative ethos to be regained while preserving the benefits of diversification.
The core of the economic model of the Nexus Mutual system is the NXM token. This token is not allowed to be listed on the exchange, thus avoiding the risk of price manipulation. A user can be a policyholder or an underwriter (also a risk assesser).
To put it simply, as shown in the figure below, a person can enter his policy page, select a policy (such as the insurance for SushiSwap), and then set the value to be insured, and how long the agreement will keep you covered, and then a policy will be produced Quotation, the user can use ETH, DAI or NXM to pay for the policy through metamask, so if he has assets in Sushi’s contract, Nexus Mutual will pay you as much as possible if there is a loophole in Sushi that causes your property loss quantity.
If you want to become an insurer, that is, an insurer, you need to purchase NXM with DAI under the Swap panel, then select an item you want to protect, such as Sushi, on the Stake interface, and then pledge a certain amount of NXM. Why do you want to do this? Nexus Mutual’s token economic model is designed as follows: when a user purchases an insurance policy, the insurer corresponding to the insured item will receive a dividend of 50% of the insured’s premium; moreover, the system will use the user’s pledged NXM to automatically calculate a certain Quotation of the policy.
In addition, these underwriters who pledged NXM also have the right to determine whether an insurance complaint is valid (that is, as a risk assesser). For example, Sushi was attacked. These people use the pledged NXM to determine whether they were victimized by the Sushi accident. Provide compensation. If the verdict is to compensate, the NXM of these pledgers will be forcibly burned, and the corresponding ETH or DAI will be transferred to the victim user.
This brings up a very embarrassing question: since the insurer has the right to decide whether to insure or not, if he insures himself, he will suffer losses. Isn’t it possible for everyone to prevent the appeal from being valid? So you can earn half of the premium amount with peace of mind? In fact, there is also a limiting factor in the agreement, that is, if the insurer deliberately gives a wrong ruling, the NXM pledged by him will also face the risk of being burned; in addition, if everyone does not let the claim pass, there will be no one in the future. Let’s buy insurance again—because it’s impossible to get claims, and there will be no projects to cooperate with it, so all pledgers don’t have to pledge their coins on the system. Therefore, for long-term considerations, people will still judge honestly and settle claims reasonably.
From here, we will find a major difference between DeFi insurance and traditional insurance:
Traditional insurance claims are all derived from the premiums of all policyholders, and the insurer does not need to pay; while DeFi insurance generally relies on the staking of the insurer to provide claims for policyholders.
Although Nexus Mutual spreads the risk to more people from the perspective of pledge-as long as you pledge NXM, it does not have the characteristics of a completely decentralized project in many aspects. First of all, whether it is for insurance, underwriting, or participation in governance with NXM, KYC is required first, so that users cannot participate anonymously. In addition, it first found a lot of experts and bigwigs in the insurance field, and let them become the underwriters. This is to prevent someone from maliciously and deliberately giving wrong rulings. The current practice makes these people have no incentive to destroy their own. Human set. Another point is that Nexus Mutual does not have a reinsurance mechanism—that is, a mechanism to insure the Nexus Mutual protocol itself, and Nexus Mutual has already been attacked by hackers (loss of 370,000 NXM at one time). It will not be okay. Another Decentralized insurance Cover provides protection for Nexus Mutual.
So far, Nexus Mutual can support the protection of DeFi smart contracts from attacks, and will also support the protection of other traditional insurance types in the future: for example, the project claims that it will try to realize earthquake insurance business in the future. Of course, not all losses caused by smart contracts will be compensated. For example, Maker has automatically liquidated the mortgage tokens of many people for a period of time. In this case, they will not be compensated because this is part of the Maker agreement mechanism-no The clearing mechanism Maker will have big problems. Only when the contract is hacked will it be compensated, such as Harvest being loaned by lightning.
Nexus Mutual, as the pioneer of DeFi insurance that went online very early, took advantage of its first-mover advantage and sat steadily on the top of DeFi insurance when it was not perfect. So far, its position remains Not swayed. In the long run, Nexus Mutual is still a good choice to insure and enjoy the benefits. However, all kinds of DeFi insurance have sprung up like mushrooms, such as msure and Cover agreements. It is still unknown whether they will surpass Nexus Mutual in the future. In the next article, I will start talking about Cover-because Cover agreements are insurance The most playable agreement so far is fantastic.
