Industry Overview
At its peak, only 2% of TVL in DeFi was insured. There is a massive opportunity for growth as the traditional insurance industry is predicted to be worth $6.4 trillion by 2025. The demand for protection against loss in crypto is extremely high and insurance allows for more capital from institutional parties and whales to be more safely deployed into the ecosystem.
Within the crypto industry, we will see growth in insurance for DAO’s as they look to legitimize by covering their treasuries and stakers as Olympus has done with InsurAce. We will also see coverage for more products outside of DeFi such as NFTs. At a high level, decentralized insurers will be able to better align policyholders and policy providers and in turn, can fix many of the problems in the current global insurance industry such as fraud, slow claim and risk assessment, and more.
Solace
Solace is a new player in the space with their public token launching at the end of November. The protocol uses a bonding mechanism similar to Olympus to incentivize the growth of their underwriting pool.
Value Proposition: Simplicity
- The UI/UX is easy to navigate to buy policies, bonds, and stake and it makes sense to someone with no experience in purchasing insurance. Pricing and claims are assessed by models which provide low pricing, quick and non-biased payouts, and transparency. Solace also offers high staking rewards (2591.73%) which is critical as there needs to be ample incentive to maintain and grow the underwriting pool.
Concerns: Not battle-tested
- Solace is currently tiny with a $10.4M underwriting pool and only covering 2.6 ETH. It needs to prove it can be consistent and reliable with more claims and large payouts. Additionally, there is a question of what will drive capital into the underwriting pool if APY decreases dramatically.
InsurAce
InsurAce has been growing rapidly over the last year offering expanded product lines across multiple chains (BSC, Ethereum, Avalanche, Polygon). The protocol operates both an investment arm and an insurance arm that works synergistically to offer “0” premium insurance, offer high investment return, and grow and retain their underwriting pool.
Value Proposition: High Non-DeFi potential
- How InsurAce is set up with an insurance arm and investment arm lends it to be able to tackle non-DeFi events such as flight delays, catastrophic events, and more. They solve many of the problems present in the current insurance industry and have been successful in handling a risky and hard-to-assess industry in DeFi while offering almost unbeatable premiums.
Concerns: Human in the loop
- Currently, the claims process is largely dominated by a group of 4 experts who publish their opinion on a claim before it goes to a vote. While InsurAce plans on decentralizing this, for right now there could be an issue with conflict of interest or speed as the number of claims increases.
Conclusion
Solace solves the major issue that is present in the insurance industry which is transparency and simplicity. What is most interesting is their automatic claims process and if they can prove that their algorithms are reliable then Solace has built something extremely valuable within the insurance industry. While I think this makes Solace more interesting than InsurAce, InsurAce has proven they can execute and grow within DeFi and are already starting to expand into traditional policy plans like flight delays. InsurAce is still very small in the scheme of DeFi alone and will continue to decentralize and automate risk and claim assessment and is in stride to become the leading player in the space. However, data-driven automatic claims are what will revolutionize this industry as a whole since in the wake of an unpredictable event people and entities need their money ASAP as days and weeks without funds can be catastrophic.
Why investigate this?
This is a high-level overview of the DeFi insurance industry which is currently almost non-existent but is set to take off as insurance is an essential part of any financial industry. Before this project, I had no experience in either traditional or DeFi/Crypto insurance so I spent time learning about the industry before diving into the protocols featured. Only two are protocols are featured (as of 01/04/2022) as those were the initial constraints for a research project but I plan to expand on this.