What is Crypto Insurance?
Cryptocurrency insurance allows exchanges and investors to reclaim a portion of their losses in the event of theft or protocol failure. Custodial institutions may offer crime insurance that protects a portion of users’ funds against losses from theft and cybersecurity breaches. For investors, there are decentralized insurance platforms like Nexus Mutual, which covers failures of an individual protocol, protects interest-bearing tokens against de-pegging events, and even protects against hacks and halted withdrawals on exchanges and custodial wallets.
Key Takeaways
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Decentralized crypto insurance usually covers smart contract vulnerabilities, devaluation, and custodian risk.
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Decentralized crypto insurance usually offers coverage for a set time frame and a set amount, although there may be a capacity limit that dictates how much cover can be bought.
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Centralized exchanges usually have their own funds for users in the event of any incidents, such as Binance’s SAFU fund.
There’s a high chance that you are holding active insurance plans, especially health and automobile insurance. Insurance companies are far-reaching in the scope of insurable entities and their list is only likely to keep growing.
The possibility of developing an insurance policy for an asset depends on its nature. Insurance policies are designed to provide recovery routes in case the insured entity is involved in unfortunate events. While there has been a need for coverage in the crypto space, it has been challenging to create insurance policies in the crypto industry, largely due to a lack of regulation, and also because crypto assets are relatively new.
How Does Crypto Insurance Work?
Unlike stocks, bonds, and cash deposits, crypto assets exist in a gray area and are therefore not included in federal insurance policies. For example, while Binance and Coinbase have their USD balances insured by up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) and are held in custodial accounts, insurance of their crypto balances are left to their discretion.
For individual users, they can buy insurance plans from decentralized insurance platforms. Plans can be for a specific cover, with set cover amount over a set cover period in the case of Nexus Mutual, or it can also be a lump sum plan that covers a set amount across multiple covers, as in the case of inSure DeFi. For protocol, exchange, or token specific plans, there is also a capacity set for every protocol, which dictates how much cover can be bought.
Users can buy these plans with a certain number of the protocol’s native tokens; for example, the lowest plan available on inSure DeFi requires 2,500 SURE tokens (~US$10), while insuring 1 ETH on Aave through Nexus Mutual requires 0.0692 NXM (~US$3.66).
In the event of a claim, members of the DAO will vote on whether to pay out on the claim or not.
What Does Decentralized Crypto Insurance Cover?
For crypto investors looking to safeguard their assets, decentralized crypto insurance platforms offer coverage for protocol losses, custodian-related losses, scams, and devaluations.
Protocol Losses
In the event users suffer financial losses due to failures in the protocol code, economic design, governance set-up or oracles, holders of relevant Nexus Mutual’s Protocol Cover can claim based on the amount insured. However, this does not cover losses due to phishing, loss of private keys, malware, exchange hacks, or any activity where the designated protocol continues to work as intended.
InsurAce offers protection for bridges, where tokens may be lost due to bridge malfunctions, hacks, or vulnerability exploits, or loss of tokens in transit to error in slippage reported by the bridge or DEX. InsurAce also offers cover for smart contract vulnerabilities for supported protocols.
Custodian Risk
Nexus Mutual’s Custody Cover and inSure DeFi’s Stolen Funds offer protection for users’ funds in the event a custodial institution closes down, is hacked (resulting in financial losses), or withdrawals are halted for more than 90 days.
Scams
inSure DeFi offers coverage for scams, where users cannot retrieve their funds after depositing, although this does not cover interacting with the wrong smart contract, sending to “instant reward wallets”, Ponzi scheme projects, or projects that offer more than 100% APY.
Devaluations
inSure DeFi offers coverage for drastic devaluations, where crypto assets lose more than 98% of the initial investment. For a token to qualify for drastic devaluations coverage, it must have its own fungible token that is listed and tracked on CoinGecko, along with being listed on at least two centralized exchanges.
Nexus Mutual also offers coverage for yield-bearing tokens, specifically ETH. In the event it de-pegs in value more than 10%, users can claim up to 90% of their loss by swapping their yield bearing token for claim payment.
InsurAce also offers stablecoin de-peg cover for BUSD, USDT, USDC, and MIM (although this plan is currently sold out). While the exact numbers differ for the different coins, it will cover claimable losses of up to 70%.
Insurance for Non-Crypto Risks
Ethereum-based insurance project Etherisic Decentralized Insurance Platform (DIP) is leveraging oracle protocols, will of community, and smart contract technology to build a generic insurance framework that delivers a basket of insurance policies for risks such as crop insurance, flight delay insurance, and hurricane protection.
Etherisic DIP has reportedly partnered with Chainlink to feed its insurance protocol with data from external sources. Insurance claims are processed using real-time data from events outside the crypto space.
The DIP token fuels the Ethereisic platform. DIP holders can hold or stake their tokens to access the full products on the platform and enjoy extra privileges and passive rewards.
Where Can I Buy Crypto Insurance?
There are multiple decentralized crypto insurance providers, and these include:
Nexus Mutual
Nexus Mutual is one of the biggest players in the decentralized insurance space with a market cap of over $357 million. Members can buy different types of cover such as yield tokens, protocols, and custodians for some of the biggest players in the space. Supported protocols include Aave, Curve, GMX, and Uniswap, while custodians covered include Binance and Coinbase.
inSure DeFi
inSure DeFi has a market cap of $106.6 million, and offers set plans, which feature a total value insured, covering multiple incidents. These range from scams and stolen funds to devaluations. This is unlike most of the other insurance providers, where plans are specific to a protocol or exchange.
Uno Re
Uno Re has a market cap of $4.6 million and offers coverage plans for smart contracts, de-pegs, and validator slashing. These are also protocol or token specific.
InsurAce
InsurAce has a market cap of $4.5 million and covers smart contract vulnerabilities, custodian risk, stablecoin de-pegs. It is also the only provider in this list that offers bridge insurance for the transfer of tokens across chains.
Are Crypto Exchanges Insured?
Now that we’ve looked at decentralized crypto insurance options, what about centralized exchanges? After all, custodial cryptocurrency exchanges are one of the most important role players in the crypto space, as they offer users an on-and-off ramp solution. While decentralized exchanges might become the go-to platform for crypto trading activities in the future, centralized exchanges are currently the face of cryptocurrency trading.
Centralized exchanges assume custody of users’ assets, which enables them to fulfill orders based on an order book,which lists the buy and sell orders for each asset on offer. Unfortunately, despite attempts to create a more reliable environment for investors, centralized exchanges are still the most vulnerable institutions in the space. This vulnerability is illustrated in the numerous mishaps that have rocked some of the biggest centralized exchanges. These mishaps also illustrate the limitations of the plans put in place to protect investors on these exchanges.
While Proof of Reserves have since been introduced to ensure that these exchanges are truly maintaining custody of crypto assets deposited on their platforms, it is only a verification system.
But are these exchanges insured?
The answer is not straightforward and even when exchanges claim to be insured, what they are insured against and the extent to which they are insured are hardly clear. The lack of clarity is mainly due to the absence of a central regulatory body that coordinates the protection of crypto investors and crypto firms. Systems like Deposit Insurance Corporations (DICs) set up by national central banks for mainstream banks would have helped in cases like this, but the crypto space is yet to develop one.
Coinbase claims to have an insurance plan of over $200 million, Bitstamp claims over $300 million in constituted insurance plans. Binance, the largest cryptocurrency exchange by daily traded volume, has a Secure Asset For User (SAFU) insurance scheme.
However, it is worthy of note that prior to its collapse, the (formerly) third largest cryptocurrency exchange by trading volume – FTX – also claimed to have insurance plans of over $250 million. Sequel to the collapse, this insurance plan was revealed to exclude customer deposits. This gives an insight into the insurance mentioned by centralized exchanges and why investors should demand a more transparent and wide coverage insurance scheme from their custodial institutions.
Can Cryptocurrency Exchanges Be Insured?
Compared to banks and other mainstream institutions, insuring a crypto exchange isn’t straightforward. This is mainly due to the nature of assets under their custody and the technology that powers their systems. Regardless, centralized cryptocurrency exchanges can be insured to a very good extent.
In a press release on February 2020, London-based insurance firm – Lloyd’s announced that it had partnered with crypto insurance firm – Coincover to provide insurance services for crypto assets held in hot wallets. According to the release, the insurance plan is available for wallet balances as low as £1,000. A Lloyd’s licensed insurance broker has also launched a crypto insurance product, Daylight, that insures crypto businesses against ransomware attacks, unintentional copyright infringement and business interruption.
Binance’s SAFU scheme is also a mirror-able deposit insurance system. Despite its efficiency not being fully tested, setting aside a portion of company revenues for customer deposit protection can serve as an improvised insurance plan for centralized exchanges and any other custodial institution. Other available options can also be explored in this sense and as the crypto space evolves, more insurance solutions are bound to emerge while existing ones get better.
Final Thoughts
According to AM Best’s associate director, Edin Imirsovic, less than 2% of crypto-related risks are currently insured. This drives home the intricacy of developing an insurance policy for risks associated with crypto assets. Custodial crypto institutions are under growing pressure to adopt risk management strategies and insurance for customer deposits, while decentralized insurance platforms are working to offer coverage plans for user needs.
However, as options for crypto insurance emerge, it is important that individual investors and institutions understand the provisions of each policy and what works best for them.
Like any other emerging concept, crypto insurance policies are likely to undergo constant changes, some of which might not be appealing to investors. Insurance companies will also attempt to develop policies that safeguard them from the volatility and risk-laden nature of the crypto space.
As a standard, endeavor to carry out due research before investing in cryptocurrency. Also, note that this content is only for educational purposes and no part was meant to be financial advice.
Joel is deeply interested in the technologies behind cryptocurrencies and blockchain networks. In his over 7 years of involvement in the space, he helps startups build a stronger internet presence through written content. Follow the author on Twitter @agboifesinachi
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