Decentralized insurance (DeFi) may be one of those epoch-defining innovations that comes along and ushers in the dawn of a new age. DeFi hits the sweet spot where disruptive technology, a new asset class, and financial services meet, a snug trifecta with the potential to transform finance. Its protocols — or autonomous systems built with smart contracts — offer traditional and novel services to form a robust, transparent and immutable financial ecosystem without a middleman.
DeFi’s growth in 2021 has been nothing short of astonishing: on January 1st of this year, the total value locked (TVL) in smart contracts was $21 billion. Less than six months later on May 10th, that value had grown to $155 billion, a 738% increase. Despite this staggering acceleration, DeFi’s TVL only accounts for approximately 5% of cryptocurrency’s total market cap.
Like any other untested technology network, DeFi creates new and unpredictable risk scenarios for the end-user. A deluge of hacks, exploits and unforeseen events underscores the need for asset protection, most notably in the form of insurance.
At the moment, DeFi protocols are generally assessed by their TVL, strength of smart contract security, and technological ingenuity. Aave, a borrowing and lending platform, currently has over $11 billion in locked assets, accounting for 10.5% of DeFi’s total TVL(DeFiLlama). This achievement didn’t happen overnight, however. Formerly known as ETHLend, Aave began operating with a small team in late 2017 and has steadily improved and adjusted its technology to suit the needs of a mercurial, volatile market. Projects like Aave, however, are an exception, not a rule. DeFi projects rise and fall within days, struck by smart contract failure, exploit or token hyperinflation. Lasting projects are those with technology that embeds itself into DeFi’s infrastructure, retaining users because of their technology, security and ingenuity.
Moreover, decentralized exchanges (DEXs) like Curve and Uniswap presented secure, simplified solutions to complex problems. The race to anticipate and solve issues hasn’t ended, either. Without question, the feeble condition of scalable insurance sits at the front of DeFi’s deficits. Protocol innovation and ecosystem enmeshment are only the first phases of the battle. The next phase involves the mitigation of all kinds of risks. Indeed, the rules of engagement are changing each day.
DeFi’s overall TVL has grown over 700% since January 1, 2021
DeFi has smart contract-based investing, lending and trading among a slew of other services and platforms. Therefore, it’d be reasonable to think large-scale decentralized insurance would follow suit. Unfortunately, that hasn’t transpired yet, and less than 1% of DeFi’s $130-plus billion TVL is held in the contracts of DeFi insurance protocols. The need for unique insurance solutions that address a variety of user concerns such as asset volatility, on-chain exposures, mempool reconfiguration threats, and so forth. Before institutional and orthodox investors can enter the asset protection field, market participants are cognizant of the fact that innovation is essential.
Due to a lack of standardized information, intricate early-stage technologies, and subjective standards that lead to intrinsic bias in data analysis, assessing risk in the cryptocurrency industry becomes an arduous task. Moreover, current provider coverage is extremely restricted, focusing on specific concerns within or connected to smart contracts while leaving protocols vulnerable to other dangers and exploits like asset volatility, flash loan assaults and mempool rescheduling.
Inefficient capital allocation and the inability to disperse risk across many pools are holding back DeFi adoption, thus causing debilitating scalability issues in the DeFi environment. With no secondary markets to manage risk and free capital for the ecosystem to develop more effectively, liquidity becomes a concern. These exploits and vulnerabilities are incredibly costly and will continue to be so as the DeFi ecosystem expands.
Their need is clear: the market requires an advanced, automated insurance protocol forged on trustless smart contracts that eradicate the precariousness at the protocol and user level, underpropping a new pennant of security and dependability within DeFi and cryptocurrency.
Smart contracts and risk analysis technologies are used to resolve disputes during Steady State’s claims process. An autonomous claims framework eliminates turbulent biases, optimizes process efficiencies, and assures that claims are settled in an irreversible manner using smart contracts.
Transparency in data outside the system also carries great importance. Steady State is building an open-source risk analysis database allows anyone in the world to capture and collect data, which is then submitted to help define parameters for malicious attacks, on-chain vulnerabilities, and black swan events. In order to calculate risk and structure insurance products, the database is crucial.
Akin to conventional finance, both the insured and underwriter can benefit from decentralized, liquid secondary markets to manage and spread risk, allowing for better capital management and an increasingly robust and scalable DeFi ecosystem. The secondary market resembles the reinsurance process in the traditional insurance business, where corporations can pool their risk to decrease exposure. It is a critical feature to build out a complete ecosystem that mitigates risk in all possible scenarios.