Was recently talking to a close friend who has been working on an insurance-focused technology company the past couple of years.
I gave him this list of projects and asked him how he would categorize them:
- Nexus Mutual
- Cover Protocol
- Tidal Finance
- Armor Finance
- Unslashed Finance
- Protekt Protocol
- Risk Harbor
- Soteria Finance
At first glance he thought there were roughly two buckets: protection against loss, theft, and smart contract failure versus DeFi insurance platforms and parametric risks. But then Nayms is a platform and marketplace so what are other nuances?
According to him, a lot of “insurance” above is really just a derivative product so in practice most of these are basically just prediction or options markets: you are betting a contract will not fail and hoping the pseudonymous claims committee rules in your favor.
A counter-argument is that all insurance is like that conceptually. But in reality, insurers try to underwrite the risk which then leads to a pricing exercise, but the prices are grounded first and foremost in risk and then market forces adjust pricing. As opposed to a pricing exercise which seems a bit divorced from the risk but mainly driven by the price action of a coin.
- Parametric risks (such as Etherisc)
- Centralized Insurance (only a handful of stealth providers)
- DeFi Insurance (theft, loss, smart contract failure)
- DeFi “Insurance” (similar to an option: if this thing doesn’t work I pay you monies, but it’s not designed as an insurance product…a subtle but important difference)
What are some other projects and categories to add in the future?
For more context, I highly recommend this thread on “DeFi insurance” from Lucius Fang (who is a trained actuary).
Lastly, I reached out to Stephen Palley, a cryptocurrency-nerd / attorney who specializes in suing insurance companies. According to him:
So the big issue for me — and I am planning on doing a long form piece on this — is that people who sell insurance are subject to a maze of state level regulatory and licensing requirements that they so far have seemed happy to ignore. If/when/as this gets bigger, people will go to prison.
It’s a huge opportunity for people who want to do things the right way. But as is typical, you have a lot of people who are jumping in who don’t actually know eff all about the foundations they are building on.