DeFi Insurance: Managing Risks of Digital Assets
Understanding DeFi insurance and its importance in mitigating DeFi risks and threats.
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A brief guide on how to purchase a cover policy in the Neptune Mutual marketplace.
If you hold digital assets and want to protect yourself against losses caused by security exploits or other similar incidents, parametric cover policies could be the answer. These policies are set up to pay out in the event that a verifiable qualifying event occurs. Rather than investigating individual claims on a one-on-one basis, parametric cover policies are based on the process of verifying the event, which, if confirmed to have triggered the policy parameters, then pays out to everyone with a policy; this dramatically speeds up the payout process and makes it more reliable.
Dedicated Cover Pools are exclusively devoted to a specific project, and they guarantee payouts to all policy purchasers if a qualifying incident occurs. Cover fees vary depending on a number of factors, including the amount of cover you're purchasing and the duration of the policy.
This is in contrast to Diversified Cover Pools which may underwrite more cover policy liability than the amount of pool underwriting capital. Diversified cover pools can be beneficial for liquidity providers because they have the chance to earn a higher return for the capital they commit to the pool. However, they do not offer cover purchases an absolute guarantee of payout because of the small possibility that multiple projects in the diverse portfolio could be hacked at the same time, requiring multiple payouts. If there was an incident affecting multiple pools, the cover provider could find themselves unable to pay everyone.
In the brick-and-mortar world, many insurance providers work this way. It's highly unlikely that every customer of an insurance provider would crash their car on the same day, and insurance companies spend a lot of time and money calculating risks and assessing claims to work out how much they're likely to need to pay out and how much liquidity they need.
The parametric cover system used in the Neptune Mutual marketplace is designed to streamline the DeFi insurance process as much as possible. Cover is offered on a selection of CeFi and DeFi projects. Users who hold NPM tokens (once available in the market) can use these tokens to report incidents or vote on incidents reported by other users, helping ensure the validity of claims made to cover pools.
The marketplace is one where blockchain projects, asset managers or investors, create their own cover pools to protect the community of their project, or portfolio of projects. If you are currently building a product and you'd like to know more about how to protect your community please don't hesitate to contact us. Our team would be happy to answer your questions.
You can also start a discussion on our community forum, and not just our team but the entire Neptunite community will be able to assist you. If you’re a project exploring how Neptune Mutual can help you protect your community, you can ask them directly on the Neptunite portal what it is they want to see from you.