Who is DeFi?

Text title: who is DeFi?

Source: daily planet Odaily

BZx  The hacker attack on the protocol has caused a crisis of trust in the DeFi ecosystem, which is regarded as the death knell of DeFi by pessimists and the growing pains of DeFi by optimists.

In the long run, the risk control design of DeFi products, the amount of money for price predictors, and the security audit of smart contracts all need to be strengthened.

From the perspective of short-term solutions, Nexus Mutual, DeFi's insurance platform, paid out $31,000 in customer claims in the bZx incident, regenerating the attention and discussion of DeFi insurance.

What is DeFi insurance? Can it play a remedial role in similar incidents next time?

This article will explore the significance and role of DeFi insurance in the entire DeFi ecosystem, the operating mode of the existing DeFi insurance products and platforms in the market, the ceiling of DeFi insurance market, and the room for improvement and event reflection of DeFi insurance.

DeFi insurance helps the DeFi ecosystem to form a business loop

BZx is not a single event. With the emergence and attention of the DeFi circuit, hackers also began to study the vulnerabilities of related products.

The biggest characteristic of DeFi is its openness: firstly, it is open to users; secondly, it is open to contracts. Therefore, it is easy to be targeted by hackers. According to PeckShield, there were seven typical DeFi attacks in 2019, and four more DeFi security incidents in February.

Among these DeFi security issues, the preferred method of attack by hackers is to attack smart contracts. DeFi products are mostly built on smart contracts and interactive protocols, code is generally open source, and assets are entirely on the chain. & have spent

It sounds as if openness is the natural counterpart of unpreventable risk. Can you buy insurance to reduce the loss afterwards?

The answer is yes.

DeFi insurance (decentralized insurance) is an insurance agreement based on a tamper-free, automatically enforced smart contract. It mainly provides risk protection against common risk events in the currency circle (including private key theft, exchange attack, wallet theft, smart contract vulnerability and manipulation, etc.).

The main advantages of DeFi insurance over traditional insurance products are enhanced compensation efficiency and transparency. Insurance companies' underwriting costs and users' premiums are lower because once written in code, they no longer have to be based on "human trust".

Another difference from traditional insurance products is that DeFi insurance was born out of the high volatility of cryptocurrencies and exists to spread the risk of currency volatility, so it is more like financial derivatives.

Decentralized chapter nine jiu ge to predict machine project NEST lovers - Odaily daily planet said, "DeFi for some DeFi product insurance is a kind of security protection, mainly within the DeFi development risk, DeFi asset volatility risk compensation. These two kinds of risks are different, is the development risk (code holes, the back door, the algorithm of arbitrage, etc.), the DeFi insurance value is higher, and also the key direction of the development of the industry; for the latter, its essence is the swap or option, more embodies the derivatives of asset price structure, "It's not strictly insurance, which will be more of a derivative product in the future, but it's also very valuable."

In addition, DeFi insurance is very helpful for the promotion and application of DeFi protocol. DForce & amp; "Insurance is a fundamental service of traditional finance, which helps to spread the risk of various types of events and promote the development of other financial products. Just like the introduction of deposit insurance by the us FDIC (federal deposit insurance corporation) has greatly promoted the development of deposit products," Yang mindao, founder of Blockpower, told the Odaily planet.

How do the different types of DeFi insurance work?

However, DeFi insurance products are still in the very early stages of development, the product model and operation mode are not yet mature, and there is no unified risk pricing system and compensation guarantee mechanism.

The DeFi insurance platforms we are familiar with are mainly Etherisc, CDx, Nexus Mutual, Opyn, VouchForMe, KeeperDAO, SWAP RATE and so on. Of these, only Nexus Mutual is designed to look most like a traditional insurance platform, with a risk-sharing model that transfers individual risks to the collective. Other insurance platforms are more like derivative instruments with certain protection nature, hedging the risk of currency volatility, or platform services only to B.

Let's take a look at how these DeFi insurance platforms work.

Etherisc -- decentralized insurance & cake; DApps  Build platform

Etherisc is a development protocol (DIP protocol) for decentralized insurance applications, which is a simple understanding of the decentralized insurance DApps building platform. Etherisc's approach is a lot like that of Aragon in the DAO space -- building a universal platform so developers can quickly build applications based on it.

So far, officials have shown three application directions: flight delay insurance, hurricane insurance and encrypted wallet insurance. There are more than 20 developing application directions on the platform.

Introduction page of hurricane insurance

Etherisc does not provide any insurance business itself, but works with insurance providers. The business scope is divided into two parts: the non-profit platform based on the token system, and the for-profit business entities, which build distributed applications on the platform and bear corresponding legal liabilities and risks, and the platform also guides the flow of these insurance products and services.

Etherisc also developed the native token, DIP, for the DApp development team and Oracle provider.

The return model for holders and insurance users in this business model

Overall, Etherisc is not an insurance platform that can pay claims directly for policyholders, it's just a decentralized insurance agreement for developers, and the main risk behind it is whether its smart contracts can work safely.

Nexus Mutual - a risk-sharing pool that allows anyone to buy insurance

Nexus Mutual, which has been in the spotlight for its recent claims on bZx users, USES a risk-sharing model with a risk-sharing pool behind it (similar to alipay's previous Mutual). The pool is managed by community members holding NXM tokens and voting on the validity of a specific claim.

Buy interface

In Nexus Mutual, all governance measures must be proposed and voted on by members, advisory boards, and owners. Proposals submitted by members shall be whitelist by the advisory committee. Each governance proposal has a category associated with it that defines the solution to be executed at the end of the vote.

On February 25th Mudit Gupta and Sam Sun, two security researchers, revealed two flaws in Nexus Mutual's governance practices that were not exploited by hackers and the insurance fund did not lose money. Roxana Danila, chief technology officer of Nexus Mutual, then posted an article on Medium detailing the breach and the solution, and thanked the two security people who discovered it. The potential loophole, Roxana explained, is that the proposed solution has not been proven to be effective before members vote on it. It was therefore possible for members of the advisory committee to whitelist specific categories of proposals while performing other operations in practice. This means that while members are voting for "the company is getting better," they are more likely to unwittingly vote for something malicious.

In general, Nexus Mutual is also essentially insurance driven by smart contracts, which means that DeFi users can hedge their risk by buying insurance for Compound or Dharma loans and Uniswap digital currency. Just "who can insure DeFi's insurance acceptors in the event of a breach in the smart contract?" The question remains unanswered.

Opyn  (oTokens) -- want to replace & NBSP; DYdX  Insurance agreement

Opyn is a decentralized insurance agreement, Opyn team think, dYdX as the earliest DeFi derivatives trading agreement, in the initial model, there are some natural defects such as support only 0 x Protocol, the option seller (option writers) can only charge in the performance of assets, etc., so the team hopes to put forward a set of more perfect agreement to replace the dYdX, namely Convexity Protocol.

Before we look at how Opyn operates an insurance policy, let's look at what a "put option" is.

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Suppose xiao zhang has a house in his hand, the current price is 2 million yuan. Because he sees a serious bubble and the market environment is not good, he always worries that the house price will drop sharply recently. But now I'm selling it for 2 million, and I'm afraid it's going to go up again and I won't be able to buy it back. So, zhang went to a real estate agent and signed a contract that after a year, no matter how the price of the house fluctuated, zhang would be able to pay 200 pounds every day. Selling the house to a real estate agent for a price of 10, 000 yuan, zhang had to pay a contract fee of 20, 000 yuan (royalties) for the contract. & have spent

Zhang's action is called a put call. If the house price is higher than 2 million yuan next year, he will not fulfill the contract and choose to sell the house at market price, so the maximum loss is 20,000 yuan of contract fee.

Opyn essentially protects a user's assets by buying a put option on Convexity Protocol, which the user USES as collateral to create an ETH oToken that represents a put option on ethereum that others can buy (the equivalent of insurance against an ETH slump).

On Feb. 13, Opyn teamed up with DeFi bank Compound to launch its first put option insurance agreement (until now, Opyn's put option insurance agreement was only a proposal), meaning that customers could still get their principal and interest back if the Compound was attacked.

Where is the ceiling for DeFi insurance?

DeFi insurance seems to have many categories, but it doesn't make much of a splash. The main reason is that the market size of DeFi insurance is limited by the size of DeFi's lock-up assets.

HashKey Capital Research believes that the ETH amount of DeFi lock is only $1 billion, so it is too early to specifically cover DeFi due to lack of motivation in developing insurance products. HashKey predicts that DeFi insurance will not grow into a relatively mature market until the overall cryptography assets reach a market value of $300 billion and bitcoin reaches a market value of about $180 billion.

Mindao Yang believes that the ultimate ceiling of the DeFi insurance segment is the same as the ceiling of DeFi itself, that is, the size of upchain assets and primary chain assets. DeFi insurance will eventually cover the market for services around digital asset trading, lending, derivatives and more. & have spent

Chapter nine jiu ge think DeFi insurance ceiling eventually ETH value scale, "because all chain risk can be insured to hedge, but the ETH code cannot be offset by the insurance risk. If we say that the ETH value measure the risk of ETH code and consensus, then without changing the ETH under the condition of the current structure (anti aggression), insurance of the ceiling is the value of the ETH." Also, look at the volatility of the asset, but this is hard to estimate, and without taking into account the volatility of the asset, the DeFi insurance ceiling is really limited by the size of the insured DeFi lock-up.

Mixed mode DeFi insurance may be the trend

Since it is difficult to break through the ceiling, does that mean that DeFi insurance can only find its way forward in a small but beautiful direction?

From these various DeFi insurance products and platform design mechanism, we can see that currently DeFi insurance platform mainly by the native insurance agreement, as well as derivatives, option agreement of financial products, such as mode is given priority to, unlike traditional cognition of life insurance, the more like help users hedge asset volatility risk of financial derivatives (also could become hackers arbitrage tools).

"I think the DeFi insurance on the market today is a very early trial, and it doesn't scale. And the risk appetite of DeFi users is high, so it may not be very attractive to them." Yang mindao summarized the pain points of DeFi insurance products in the market. & have spent

As mentioned above the Nexus of Mutual, currently driven by intelligent contract DeFi insurance mode also faces risks from system, Yang Min way a example to describe the risk, "I have done a metaphor, it is similar to an insurance underwriter, to the passengers on the Titanic underwriting, and this only insurers also boarded the Titanic." & have spent

Yang mindao proposes an interesting solution to this problem: combined with out-of-chain insurance, it is possible to insure core DeFi infrastructure through a universal insurance, which can socialize potential losses on a larger scale. & have spent

Specifically, a Universal Insurance based on DeFi protocol is established to guarantee the audited DeFi protocol with a lockup size of more than $1,000w, stable operation for half a year and limited management rights. Anyone can mortgage ethereum or bitcoin to enter the underwriting pool and earn the Insurance fee. Such insurance effectively socializes losses caused by "associated risks due to interoperability between DeFi protocols."

In this way, getting whitelist auditor audits covers smart contract risk and Oracle risk, which covers most DeFi risk. "As the industry evolves, insurance against DeFi will certainly accelerate, but it will be a hybrid model, not a full decentralization." & have spent

The emergence of DeFi insurance, a hybrid model, should boost the enthusiasm for financial innovation across the DeFi industry. Just as security is the most important link in the impossible triangle of block chain, DeFi insurance will become a necessary link in the lego combination of DeFi finance. On the one hand, DeFi product portfolio forms a closed loop of mortgage, loan, transaction and claim, accelerating the maturity of DeFi application market. On the other hand, it will stimulate the emergence of more DeFi application scenarios, prompting the DeFi domain to continue to flow more money and more users. & have spent

References:

Orange Book: the patron saint of DeFi: talk about the new circuit "insurance"

Medium: Responsible Vulnerability Disclosure

Medium: Nexus Mutual Launch -- How our digital cooperative works

Medium: Introducing CDx,The Protocol for Tokenized Credit Default Swaps on Ethereum

Original address:https://www.odaily.com/post/5146882

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