Insurance Is the Silent DeFi Guardian

Insurance companies have historically shaped standards and promoted safer practices throughout society. In the automobile industry, they drove the development and adoption of now-ubiquitous safety measures –. By reducing premium payments for vehicles equipped with safety features, insurance companies helped align incentive mechanisms for car manufacturers and drivers and enforce higher safety standards.

In this stage of its evolution, DeFi is exposed to a myriad of risks including smart contract vulnerabilities and regulatory, economic, and governance risks. This creates an opportunity for insurers to step in and act as a de facto regulator to enhance the resilience of the on-chain ecosystem and foster more trustworthy on-chain finance where user funds are protected at all times.

So far, insurers have relied upon organizations such centralized exchanges and DAOs to create the framework for possible insurance offerings. Centralized exchanges still have fairly limited markets, and mostly utilize insurers to re-insure their exposure. Users seeking protection against their exposures on exchanges that don’t offer coverage, now are being offered coverage by DAOs for their individual risks.

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