Insurance models are required to build a strong foundation for the mainstream adoption of DeFi. But while conceptually trivial, the mechanics of building insurance mechanisms for the DeFi space are incredibly challenging, says jrdothoughts. Opinion.
The inherent risk in the decentralized finance market has been one of the most discussed topics in the last few months in the crypto market. It feels that not a week goes by in which investors are not suffering severe losses in DeFi via technical exploits or disproportional economic vulnerabilities. Robust risk management is paramount to catalyze the adoption of DeFi, particularly from an institutional standpoint.
Insurance can be considered the missing link in DeFi. Every financial market in history has had insurance mechanisms. Granted, in traditional finance most insurance models are targeted to protect intermediaries that are absorbing the bulk of the risk in transactions. Insurance models for DeFi could be drastically different, and that’s what makes this a fascinating topic.Establishing insurance-efficient models in DeFi starts by understanding the fundamental types of risks in the space.
Economic risk represents one of the major barriers to entry for investors in DeFi protocols. Every day there are millions lost to economic inefficiencies in DeFi protocols, and this remains a largely unaddressed problem.A classic example in DeFi occurred when long-term ether holders were earning yields in ETH-stETH pools in protocols like Curve or Balancer. The objective of many of those investors was to earn additional yield on ETH.
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