Defender of DeFi: talk about the new circuit "insurance"

Original title: DeFi's patron saint: talk about the new circuit "insurance"

Source: Orange Book

About two or three months ago, I interviewed a marketing friend online. When we talked about DeFi, this friend mentioned that his team talks to a lot of institutional investors every month. They have a lot of money and they want to put it into Compound agreements to earn interest, but they have two big concerns.

The first concern is legal compliance, if the organization to touch the money, how the company's legal documents to write compliance is a big problem; The second concern is that the DeFi industry lacks a stable and secure insurance business, so they are afraid to enter the market. When I asked if the so-called insurance business meant centralized or decentralized insurance, he said he didn't know. Maybe it didn't matter whether it was decentralized or not.

Of course, it may seem a bit unrealistic to expect traditional insurance companies to provide business in a niche such as DeFi or digital currency. The more fundamentalist idea of "decentralised insurance" seems, then, to be another big market that DeFi hopes to disrupt.

1 concept

Like DeFi, decentralized insurance has many "desirable benefits." One of its main ideas is to power the traditional insurance business with smart contracts that cannot be tampered with and are automatically enforced. In the traditional insurance industry, for example, claims are often difficult and take a long time. If written in the form of a smart contract, once mutually agreed terms are met, compensation can be made immediately, even if no claim is made.

Another "supposed benefit" is to make the insurance business process more efficient and transparent through blockchain, while holding insurers more accountable because once the terms are written in code they no longer have to trust their employees. This may save insurers some administrative costs and, in turn, lower the cost of premiums for customers.

Most importantly, the permission-free nature of blockchain could lead to new users for insurance. In many cases, insurance companies need a lot of personal information about their customers before they can offer policies. Health insurance, for example, requires customer information in order to price policies. But there are many more common kinds of insurance, such as property insurance, lodger's insurance, flood insurance and so on, that would attract more people without the current red - letter procedures.

Decentralized insurance agreements, like decentralized financial agreements, want to lower the threshold of the traditional industry they correspond to and transform it into an open ecology without permission, and finally democratize the power of finance and insurance into more individual hands. Decentralised finance may be about leveraging more individuals, whereas decentralised insurance hopes to act as a firewall for society as a whole, providing security.

2 actual situation

The idea looks good, but what about the actual thing?

There are already several different types of insurance agreements in the industry, with different coverage scenarios. But in general, just as DeFi does ecology around the native assets on the chain first, so does decentralized insurance start with the native scenario, a large part of which is the DeFi ecology.

Therefore, insurance agreements mainly provide protection services for a wide variety of DeFi products and loan scenarios, while the traditional insurance industry in the world under the chain provides relatively less accident insurance and life insurance. Thus, decentralized insurance has the concept of DeFi.

In the coin circle, several common attacks mainly include: private key theft, exchange attack, wallet theft, smart contract vulnerability manipulation and so on. These are also the things that users fear most about themselves. Therefore, decentralized insurance protocols often provide some insurance services for users to use in these scenarios.

List some existing insurance agreements and products:

Etherisc
Nexus Mutual
CDx
oTokens
VouchForMe

Let's take a look at each of these protocols or product models.

Three different models

3.1 Etherisc

Etherisc's approach is much like that of Aragon in the DAO space -- building a generic, decentralized insurance application platform that allows developers to quickly develop new insurance products.

Etherisc's core team developed some insurance common infrastructure, product templates, and insurance license-as-a-service, allowing anyone to create their own insurance product.

So far Etherisc has designed a basic set of insurance products, ranging from flight delay and hurricane insurance to encrypted wallets and mortgage insurance, but most seem to be demo tests.

3.2 Nexus Mutual

Nexus Mutual follows a risk-sharing model, with a risk-sharing pool governed by members of the community holding the NXM token, which votes on which claim is valid.

Nexus Mutual initially offered smart contract insurance, which allowed anyone to buy insurance on any open ethereum smart contract. This means that DeFi users can now buy insurance to protect their money borrowed from Compound or Dharma and their digital currency stored in Uniswap. Nexus Mutual also hopes to offer more blockchain and traditional insurance products in addition to smart contract insurance.

In fact, the model of risk sharing pool also appeared before there was no blockchain, namely "mutual insurance" launched by alipay before. For traditional insurance industry, this model is more like a social experiment, because partners alleged irregularities are fine silver circ, ant gold take follow-up is the "mutual insurance" renamed "treasure" to each other, positioning became a mutual plan based on the Internet - this pattern in the traditional industry seems to be falsified.

3.3 CDx

CDx is the trading platform of token insurance. It's a credit default swap agreement. A credit default swap is a financial product designed to protect a user from the risk of default by another party. The buyer pays a continuous fee during the insurance period and receives compensation if a breach occurs.

Credit default swap is the most common credit derivative in the foreign bond market. It refers to a contract between the buyer and the seller for the risk conversion of a specified credit event within a certain period of time. The buyer of credit risk protection pays the seller of credit risk protection a fee for a credit event of a reference entity on a regular basis during the term of the contract or prior to the occurrence of a credit event in exchange for compensation after the occurrence of a credit event.

On CDx, the contract for this risky transformation is called Swap. You can create a Swap by casting a unique token corresponding to the Swap type. When creating a Swap, the seller sets up the total amount of assets to be insured and the expected compensation amount, and then the buyer can decide whether to buy the Swap after seeing it. The Swap is matched through some relayer service providers, and finally the transaction is made on the chain. At the same time, Swap can be like ordinary token trading in the secondary market. If the default, the holders of Swap can Swap to the corresponding compensation.

Exchange insurance is probably one of the most popular types of insurance. CDx hopes to use credit-default swaps to allow users to insure their assets on the exchange.

3.4 oTokens

Convexity Protocol is a new option Protocol based on ERC20 homogeneous token in DeFi, which is only a proposal but no actual product at present. Under the proposal, oTokens (option token) could be used as an insurance tool that works more like derivatives and options trading.

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

With the Convexity Protocol, users could buy put options to protect their assets.

In traditional finance, an investor who buys a stock for $50 a share can ask the option seller to buy a $40 put if he is worried that the stock will plumb to $20. An investor has the right to convert $40 cash to a seller at any time, but is under no obligation to do so if the price stabilizes or even rises, so he can enjoy the benefit of a possible rise in the stock while accepting a minimum price of $40, which is a form of insurance. Option sellers earn their own fees by selling options.

Basically, the Convexity Protocol wants to replicate this functionality from traditional finance into the DeFi domain and offer option sellers more flexible options with fewer restrictions. By mortgaging ethereum, one can forge an ETH oToken, which represents a put option on ethereum that can be bought to insure against an ETH crash. The user who mints the oToken is mortgaging the ETH put option for an additional benefit, and making money on the ETH.

3.5 VouchForMe

The idea of VouchForMe can be seen from the product name, they hope to reduce the cost of insurance with the help of social network. Your family and friends know you better than others and are more aware of your risks. VouchForMe hopes to collect guarantors willing to endorse you from social networks and social relationships for users, and make insurance companies believe that you meet the requirements through guarantors, so as to reduce the cost of insurance. When guaranty needs to sign the financial undertaking that links with insurance claim, the more the person that guarantees for you, insurance cost is lower, if appear the circumstance of claim, the guarantor undertakes by certain proportion.

3.6 other modes

In addition to insurance-based protocols and models of financial products such as derivatives trading and option agreements, the predictive market can also be used as an insurance mechanism. In Augur, for example, you can hedge your exposure by creating a prediction market, but this model requires that you have enough people willing to bet on the prediction market.

Insurance vs derivatives vs forecast markets

As can be seen from the above models, in order to achieve the purpose of "insurance", in addition to designing original protocols for insurance, the existing models in DeFi, such as financial derivatives and prediction market, can also serve as a means of insurance to provide security for users, whether it is risk hedging or capital guarantee.

So which model is better? If we can use DeFi's existing patterns and protocols for insurance purposes, do we need to develop new protocols specifically for insurance? The founders of Nexus Mutual recently wrote an article specifically answering that question. He compares the pros and cons of insurance, derivatives and forecasting markets.

In his view, the biggest difference between insurance agreements and models such as financial derivatives and forecast markets is that insurance has a pool of risk sharing, which can be paid out at a lower cost because of the risk sharing. In the derivatives and forecasting markets 100% of the mortgage capital is required to pay out. Especially when there is a very low probability of a risk happening, say 1% a year, then obviously the insurance model is much cheaper than the cost of derivatives and forecasting the market. Another benefit of risk pooling is that products are more liquid and gather faster when they start.

But in terms of flexibility, derivatives and forecasting markets are easier, cheaper and faster to develop because they are standardized and conform to technical standards. Insurance agreements are less flexible, and opening a new pool of risk-sharing requires a lot of research and pricing to make sure it works.

Other differences include that in Oracle, Nexus Mutual and Augur are all based on a community vote, while Etherisc USES an external forecourt as the basis for claims, while derivatives do not have a forecourt, and users redeem put calls directly at a predetermined price. This is an advantage of derivatives as a means of insurance.

5 concludes

As the entire DeFi industry continues to evolve, it is anticipated that insurance will continue to expand the coverage of the entire DeFi as an important component of DeFi. DeFi for third world countries, lacking the ability to development of underdeveloped regions, and financial services market provides an interesting opportunity, as the growth of the DeFi warehouse asset lock with a variety of DeFi the emergence of new products, smart insurance contract, insurance, wallets and other DeFi insurance exchanges may be a block chain investors focus on the next focus.

The original address: https://mp.weixin.qq.com/s/hYpPOLtgPsJdqfDDqMRUIA

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