The crypto insurance market is expanding with decentralized and centralized options

Insurance is the key to financial protection of important assets. Still, the cryptocurrency sector — which is predicted to reach a global market size of $4.94 billion by 2030 — may be lagging behind when it comes to insuring digital assets.

For example, it has been noted that less than 1% of all crypto investments are currently insured. These statistics are alarming, considering the rapid growth and high-risk profile associated with today’s cryptocurrency market.

Ben Davis, digital asset team leader at Superscript – a UK startup and Lloyd’s of London licensed insurance broker – told Cointelegraph that crypto has been marginalized when it comes to insurance solutions.

“Superscript has spent years focusing on insurance for emerging technology fields. I lead a team that focuses specifically on crypto and never in my career have I seen an industry more marginalized, he said. Although the cryptocurrency sector is on the rise, Davis believes that the insurance solutions are still lacking due to the industry’s strong financial focus He said:

“Crypto deals with something very fundamental, which is money. But as a society, we tend to shy away from this topic. When a technology sector focuses on difficult questions related to the value and exchange of money, insurance companies tend to move away from this conversation.”

Growing need for crypto insurance

While this may be, the need for insurance solutions within the crypto industry is becoming more important than ever before. To fill this gap, Davis explained that Superscript is taking a centralized approach to bridge the gap between traditional insurance providers and crypto companies. “We translate the risk associated with digital assets to the wider insurance community. Everyone on our team holds and interacts with crypto, so we speak the language,” he commented.

As a Lloyd’s broker, Davis elaborated that the firm has experience getting clients in front of multiple insurance companies. As such, the firm has a centralized finance (CeFi) approach by presenting crypto companies to insurance providers that suit their needs. “We work with many non-fungible token organizations, or crypto companies that work with big names in entertainment, to secure contracts with traditional insurance companies. We offer insurance for the full range of digital asset businesses, including tokenization platforms, miners, custodians, blockchain developers and more ,” he shared.

As for the process involved, Davis explained that Superscript helps insurers communicate risk concerns related to cryptocurrency to ensure they can work with digital asset companies. Like most traditional insurance providers, Davis pointed out that insurance companies working with crypto will take premiums in fiat currency rather than in crypto. “We are currently looking at ways to innovate by making this process more seamless for our customers,” added Davis.

While Superscript aims to bridge the gap between traditional insurance companies and crypto companies, a number of decentralized finance insurance (DeFi) solutions have also emerged. Dan Thomson, Chief Marketing Officer of InsurAce.io – a decentralized financial risk protection protocol – told Cointelegraph that while crypto insurance is broad, it fundamentally means that crypto users are protected against certain risks and catastrophic losses to their portfolios. “It’s a financial insurance tool that’s emerging in the wake of a multi-trillion dollar market,” he said.

Given this, Thomson explained that InsurAce aims to address the inherent risks associated with DeFi protocols. To do so, Thomson mentioned that InsurAce works by allocating venture capital in its protocol as insurance capacity. DeFi users are then able to purchase this capacity to cover their investments and assets in various protocols. “In the event of an exploit, for example, customers can claim via the InsurAce app. The decentralized organization, or DAO, will then vote on the legitimacy of those claims, Thomson said.

Although this process differs from traditional insurance solutions, it has proven to be effective. According to Thomson, InsurAce’s biggest payout occurred when the Terra ecosystem collapsed in May 2022.

Recent: Does Ethereum Merge Offer a New Destination for Institutional Investors?

“We received a total of 180 claims. InsurAce paid out $11.7 million to 155 affected TerraUSD Classic (USTC) victims,” ​​he said. About 8% of InsurAce’s USTC payout was made in stablecoins, while 60% consisted of layer-1 tokens, and the remaining 4 % was paid in the platform’s INSUR token According to Thomson, this process took one month to complete, which is usually faster than payouts processed by traditional insurance companies.

Given the decentralized nature of the crypto sector, it should come as no surprise that other projects are focusing on DeFi insurance. Adam Hofmann, founder and CEO of decentralized insurance protocol Nimble, told Cointelegraph that digital assets must be backed by insurance for the crypto sector to move forward. After spending 22 years in the traditional insurance sector, Hofmann founded his firm in June 2021 with the goal of creating a more democratized insurance process.

Hofmann explained that Nimble uses traditional insurance concepts for decentralized finance. For example, the platform is built on the Algorand blockchain and works to secure DeFi projects powered by Algorand. But like traditional insurance providers, Hoffman explained, Nimble is made up of underwriters, claims adjusters and loss adjusters, all pulled together to help facilitate “risk pools.”

“A risk pool is like a liquidity pool, but this means that private and institutional investors allocate money to subsidize the risk of insurance. This creates a more democratized insurance process,” he noted.

Hofmann added that Nimble works directly with customers to gather important information needed for underwriting. This data is then released to the Nimble portal, allowing users to purchase insurance for certain DeFi platforms.

“If users stake an amount of crypto on a platform we support, they can buy the insurance at a price. That premium goes into the risk pool for that project, and customers receive a non-fungible token in the crypto wallet that represents that insurance,” he explained. In the event of a DeFi hack, Hofmann mentioned that customers will be notified immediately and receive payouts in crypto directly to their wallet upon community and smart contract approval.

In fact, democratization seems to be a common theme among crypto insurance providers. For example, Nexus Mutual is a discretionary limited liability company that currently covers millions of dollars in Ether (ETH) for various DeFi projects.

Hugh Karp, the firm’s founder, told Cointelegraph that the platform is an automated version of a very old structure where members share risk together. “The primary problem Nexus solves is the sharing of new and emerging risks in the cryptocurrency space where coverage is not available in normal markets.” According to Karp, Nexus does this by letting members decide how risks should be priced, along with how claim payments should be made.

While this approach may be a good fit for the crypto industry, Karp noted that building trust with customers to ensure that real claims will be paid remains a challenge. “This can only be achieved with time and a track record. It is also challenging to price risk correctly and we have seen some other crypto insurance platforms struggle with this recently with the Terra collapse.”

Education is crucial for DeFi and CeFi insurance to take off

While some members of the cryptocurrency ecosystem view centralized approaches to insuring digital assets as harmful, it is clear that both CeFi and DeFi solutions are necessary. “Traditional CeFi insurers often get a bad rap, but this year alone I’ve seen more traditional insurers enter the crypto space than I’ve seen in the last five years of my career,” Davis said.

This has become the case, especially as more institutional investors enter the digital asset sector. “Many of the companies we insure need to have financial backing from traditional insurance providers that are regulated,” Davis noted. This notion is also beginning to resonate with DeFi vendors. For example, Hofmann mentioned that Nimble is in the process of obtaining an insurance license through the Bermuda Monetary Authority to ensure both DeFi and traditional insurance capital protection. In the meantime, Hofmann believes it is important that the Algorand Foundation supports Nimble by providing a certification of the platform for users.

Even with certifications and credibility, insuring crypto assets remains a tricky business. For example, a number of cryptocurrency exchanges have come under fire recently for making false claims about being insured.

Last month, leading cryptocurrency exchange FTX received a letter from the Federal Deposit Insurance Corporation (FDIC) accusing the exchange of falsely implying that user funds were FDIC insured.

Also, Celsius – the cryptocurrency lending platform that recently went bankrupt – is facing a lawsuit based on false claims that users’ digital assets were insured. “The challenge with the insurance industry is that it can be confusing. People, along with organizations, sometimes don’t know what they’re actually covered for, Davis says. Because of this, Davis believes that trust in an organization or an entire industry can be easily eroded.

Recent: The Metaverse is becoming a platform to unite the fashion community

To ensure steady development going forward, industry experts agree that more education is needed. For Davis, this starts with educating traditional insurance brokers on how to handle crypto claims. DeFi-focused solutions, on the other hand, need to focus on helping investors understand what is being covered from the start.

“For example, market volatility can create confusion. InsurAce also does not KYC clients, but a protocol listed that their assets are insured through us on their website. When the Terra incident occurred, clients were unclear about their coverage,” Thomson said. Given this complexity , Thomson believes that the vast majority of insurance coverage will be provided by crypto-native solutions.

“The risks are very new and require deep specialist knowledge, which our members have. Some traditional vendors have started to dip their toe into the space, but I suspect they will have some false starts and progress will take quite a while.”