How to DeFi

Insurance

DeFi beginner
security

What

Insurance is a way for people to protect themselves from potential risks. You buy insurance from an insurance company for some fee, and if an accident occurs, the company compensates you. Insurance companies are essentially a way for people to socialise their risks (e.g. illness, by pooling their money together. In DeFi, just as there are decentralised protocols built for people to lend out and/or exchange their tokens, there are insurance protocols where one can buy insurance against accidents on the blockchain — or put their funds in the insurance pools to cover others from losses in exchange for rewards.

Why

Insurance is still a nascent and fairly niche sector in crypto. DeFi insurance products typically give cover for smart contract failures (exploited bugs). While this is certainly a considerable risk when using DeFi in general, the cost of buying DeFi insurance on top of (for example) a DeFi loan is simply not worth the extra work for many people. As the industry evolves, we may see a broader use of insurance contracts issued on blockchains.

Risk

Ironically, decentralised insurance applications may be exploitable themselves.

Reward

Insurance, but on the blockchain.