While on-chain insurance has been around since 2017, only a measly 1% of all crypto investments are actually covered by insurance, meaning the industry remains a “sleeping giant,” according to a crypto insurance executive.

Speaking to Cointelegraph, Dan Thomson, the CMO of decentralized cover protocol InsurAce said there is a massive disparity between the total value locked (TVL) in crypto and decentralized finance (DeFi) protocols and the percentage of that TVL with insurance coverage:

“DeFi insurance is a sleeping giant. With less than 1% of all crypto covered and less than 3% of DeFi, there’s a huge market opportunity still to be realized.”
Though plenty of investment has poured into smart contract security audits, on-chain insurance serves as a viable solution for digital asset protection — such as when a smart contract is exploited or the frontend of a Web3 protocol is compromised.

The collapse of Terra (LUNA) and the resulting depeg of Terra USD provides a textbook example of how on-chain insurance can protect investors, notes Thompson, adding that InsurAce “paid out $11.7 million to 155 affected UST victims.”

“Hacks in 2021 in DeFi alone accounted for $2.6 billion in losses” amounting to $10 billion in the wider crypto space, and “we’re way past that in 2022 already,” Thomson added, emphasizing the need for on-chain insurance for digital assets.

Discussing whether traditional insurance firms may eventually offer crypto-focused products, Thomson said while it has piqued the interest of traditional firms, they have not yet moved into the space “due to their own regulations and compliance,” adding:

“I do not believe the larger traditional insurance companies will develop their own native apps for the space, but will prefer to offer a type of reinsurance as a way of getting exposure.”
Thomson said that on-chain insurance protocols have also suffered some setbacks of their own however, noting that capacity has stalled the growth of on-chain insurance protocols:

“Capacities are limited by underwriting [which is] something traditionally done with reinsurance but in DeFi it’s done by stakers and therefore limited by TVL [which makes it] hard for most protocols to build sufficient liquidity.”
This problem is exacerbated by the fact that on-chain insurance providers struggle to offer capital providers with attractive investment returns, which in turn discourages liquidity provision, he said.
Source: Cointelegraph

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