Decentralized finance (DeFi) has transformed how individuals interact with financial systems, offering opportunities for lending, borrowing, and trading without intermediaries. However, the DeFi ecosystem carries risks such as smart contract vulnerabilities, hacks, and stablecoin depegging, which have led to over $2 billion losses in 2023 alone, according to on-chain data.
DeFi insurance provides a safety net by allowing users to purchase coverage against these risks through decentralized platforms that use smart contracts to manage premiums, claims, and payouts. For beginners, selecting a trustworthy platform to buy DeFi insurance is critical to safeguarding assets.
A report by OpenCover (PDF), a decentralised finance analytics firm, says $34.4 million were paid out as claims by DeFi insurance firms in 2022, pointing to the roles and significance of DeFi insurance companies. The report says $22.5 million was paid out during the collapse of the Terra Luna in May 2022 and while $4.7 million was paid out as claims after the collapse of crypto exchange FTX in November 2022.
This article explores four reputable DeFi insurance providers – Nexus Mutual, InsurAce, Tidal Finance, and Bridge Mutual, covering what they offer, the pros, and cons, to help new users make informed decisions.
Understanding DeFi Insurance
DeFi insurance platforms operate on blockchain technology, using smart contracts to automate processes like premium collection and claim payouts. Users contribute to decentralized pools that cover specific risks, such as smart contract failures or exchange hacks.
These platforms often involve community governance, where token holders vote on claims or protocol changes, ensuring transparency. Coverage types vary, including protection against protocol exploits, stablecoin depegging, and custodial risks.
Premiums depend on factors like coverage type, duration, and the platform’s risk assessment model. Below, we examine four leading platforms to buy DeFi insurance, focusing on their features, strengths, and weaknesses.
Nexus Mutual
Nexus Mutual, launched in 2019, is a pioneer in DeFi insurance, operating primarily on Ethereum. It offers coverage for smart contract risks, centralized exchange hacks, and custodial failures.
How it works
Users purchase coverage by specifying the protocol, amount, and duration (30, 90, or 365 days), paying premiums in ETH or DAI. Nexus Mutual uses a community-driven model where NXM token holders vote on claims, ensuring decentralized decision-making.
Pros
Established reputation: Nexus Mutual is one of the earliest DeFi insurance platforms, with a track record of paying out over $18 million in claims since its establishment in 2019, as reported by Coindesk, a digital assets-dedicated website. This demonstrates reliability in handling claims.
Broad coverage options: It covers a wide range of risks, including smart contract bugs, exchange hacks, and yield token losses, making it a great option for DeFi users.
Transparency: The platform’s open-source nature allows users to view capitalization data, fostering trust through public disclosure.
Cons
Complex governance: The community voting process for claims can be slow and may lead to disputes, as there’s no robust mechanism for challenging denied claims.
Ethereum-only limitation: Coverage is primarily for Ethereum-based protocols, which may not suit users on other blockchains like Binance Smart Chain or Polygon.
High entry barrier: Beginners may find the platform’s interface and token-based governance challenging, requiring technical knowledge to navigate.
InsurAce
InsurAce is a multi-chain DeFi insurance platform supporting over 140 protocols across 20+ blockchains, including Ethereum, Binance Smart Chain, and Polygon. It offers a “Portfolio Cover” product that insures multiple protocols in a single policy, alongside coverage for smart contract risks, stablecoin depegging, and centralized exchange failures. The INSUR token enables governance participation and staking rewards.
Pros
Multi-chain support: InsurAce’s coverage across multiple blockchains makes it ideal for users with assets on diverse networks, addressing varied risk profiles.
Low premiums: The platform emphasizes capital efficiency, offering competitive premiums that appeal to cost-conscious users.
Community governance: INSUR token holders participate in claim assessments and protocol decisions, enhancing transparency and user involvement.
Cons
Complexity for newcomers: The wide range of covered protocols and technical terms can overwhelm beginners, requiring a learning curve to select appropriate coverage.
Claim processing delays: Some users claim that that community-driven claim assessments may lead to slower payouts compared to automated systems.
Limited claim history: While InsurAce has processed claims, its payout volume is less documented than Nexus Mutual’s, potentially raising concerns about reliability and transparency.
Our thoughts
We hope that the company will address this concern very soon. Claim history not only shows how transparent a DeFi platform is, but also enhances confidence and trust by users.
Tidal Finance
Tidal Finance is a decentralized insurance marketplace that connects buyers and sellers to create customizable coverage pools. It supports multiple blockchains and allows projects to design tailored insurance products for their smart contracts. Liquidity providers earn returns by staking capital, while buyers pay premiums based on the chosen coverage.
Pros
Customizable coverage: Tidal’s modular architecture enables protocols and DAOs to create specific insurance products, offering flexibility for niche DeFi projects.
Capital efficiency: The platform optimizes capital use, providing competitive premiums and attractive returns for liquidity providers.
Multi-chain compatibility: Support for various blockchains ensures accessibility for users across different DeFi ecosystems.
Cons
Smaller community: Tidal has a smaller user base and less total value locked (TVL) compared to Nexus Mutual or InsurAce, which may affect pool liquidity.
Limited track record: As a newer platform, Tidal has fewer documented claims, making it harder to assess its reliability under stress.
Technical complexity: Custom pool creation and risk assessment require a deeper understanding of DeFi, which may deter beginners.
Bridge Mutual
Bridge Mutual is a peer-to-peer DeFi insurance platform offering coverage for smart contract vulnerabilities, stablecoin depegging, and centralized exchange issues. Users can stake BMI tokens to participate in governance and earn rewards, while the platform supports thousands of coverage pools for various protocols.
Pros
Diverse coverage pools: Bridge Mutual’s extensive pool options allow users to insure a wide range of DeFi protocols and assets, enhancing flexibility.
Community-driven model: The peer-to-peer structure and BMI token governance promote transparency and user participation in claim decisions.
Proven claims processing: The platform has processed over $6 million in claims, indicating reliability in handling payouts.
Cons
Governance risks: Mixing governance with claims management can lead to biases or delays, potentially affecting fairness
Platform stability: Some users report occasional interface issues, which can frustrate new users trying to purchase coverage.
Smaller market presence: Compared to Nexus Mutual, Bridge Mutual has less brand recognition in the DeFi insurance space, potentially limiting its adoption.
Claim disputes: The community voting process can sometimes lead to disagreements, as seen in other platforms with similar models, which may delay payouts.
Choosing the Right Platform
When selecting a platforms to buy DeFi insurance, consider the following factors:
Coverage needs: Does the DeFi insurance platform cover the specific risks you want to insure, such as smart contract failures or stablecoin depegging?
Nexus Mutual and InsurAce offer broad coverage, while Tidal and Bridge Mutual provide customizable options.
Blockchain compatibility: Does the platform supports the blockchain networks you use? You need to know that coverage may vary. InsurAce and Tidal are multi-chain, while Nexus Mutual focuses on Ethereum.
Platform history and TVL: Established platforms like Nexus Mutual with higher TVL may offer more liquidity and stability, but newer platforms like Tidal may provide innovative features.
Ease of use: Beginners may prefer platforms with straightforward interfaces, while experienced users might prioritize governance features.
Community governance: Platforms with strong community involvement, like Nexus Mutual and Bridge Mutual, may appeal to users who value decentralized decision-making.
Conclusion
DeFi insurance providers like Nexus Mutual, InsurAce, Tidal Finance, and Bridge Mutual offer reliable solutions for protecting crypto assets in the decentralized finance ecosystem. Each platform has unique strengths and weaknesses, catering to different user needs.
Nexus Mutual is ideal for Ethereum-focused users with its established reputation, while InsurAce suits those with multi-chain portfolios. Tidal Finance, on the other hand, offers customizable coverage for niche projects, and Bridge Mutual provides a peer-to-peer model with diverse pools. By assessing your coverage requirements, blockchain preferences, and comfort with platform complexity, you can choose a trustworthy provider to safeguard your DeFi investments.