DeFi (Decentralized Finance) insurance is a vital investment for those engaging in staking, yield farming, and other DeFi services. However, the claims process can be complex depending on the insurance provider's assessment of incidents. This can cause users to feel anxious about dealing with the aftermath of a project smart contract hack because of uncertainty surrounding the claim approval process. To simplify the process and provide swift, impartial, and transparent resolution, parametric cover is an approach that offers these advantages, as well as a number of others.
As of January 2023, there was an estimated $284 million locked up in DeFi insurance protocols, meaning less than 1% of the total assets sitting in major DeFi protocols such as Aave and Lido were covered. There is significant growth potential in the DeFi insurance market, but to attract more users, the insurance system needs to be simplified, made more efficient, and transparent.
The Trouble with Discretionary Cover & Individual Claims Assessment#
The DeFi (Decentralized Finance) insurance market is still in its early stages of development, and insurance providers are currently using various methods to manage claims processing and payout. One common approach is to use discretionary cover, similar to traditional insurance, where claims undergo a manual investigation before being paid out. Some providers use their governance tokens to manage payouts, giving token holders a say in which claims will be successful.
However, discretionary cover can lead to a stressful claims process for policyholders, particularly when an incident affects a large number of people, leading to delays in payouts. As the DeFi market grows, it will become increasingly challenging to assess individual claims manually, leading to potential scaling issues.
From the policyholder's perspective, discretionary cover raises concerns about how claims are assessed and the likelihood of approval. While some DeFi insurers publish records of their claims history and provide transparency about their claim assessment methods, the waiting period and uncertainty can be frustrating for claimants.
To address these challenges, DeFi insurance providers must focus on improving their claims processing and payout systems.
Parametric Cover - A New Way of Assessing Incidents#
Neptune Mutual is a DeFi insurance platform that offers a unique parametric cover system to its policyholders. This system simplifies the claim process by automatically triggering payouts when specific predetermined conditions are met, removing the need for lengthy and complicated claim assessments.
When a policyholder reports an incident, the claim is assessed following a predefined process, which includes a cooling-off period of seven days. During this time, the incident is reviewed to confirm that it meets the qualifying criteria for a payout.
Once it's confirmed that a qualifying incident has occurred, policyholders can make their claims, and in most cases, the claims will be settled within seven days. This process is faster and easier to understand than in traditional insurance processes, making it more accessible and scalable for DeFi adoption.
By using a parametric cover system, Neptune Mutual can provide DeFi users with a faster, more efficient, and less stressful insurance experience. This type of system also allows for more automation and scalability in the insurance industry, which is essential for meeting the needs of the growing DeFi market.
Neptune Mutual’s Incident Reporting Process#
Neptune Mutual's incident reporting process is a way for users and researchers to contribute to the security of the DeFi ecosystem by identifying potential hacks or exploits in projects with a Neptune Mutual Cover Pool. To report an incident, a user needs to stake some Neptune Mutual (NPM) tokens (or PoTs prior to TGE), which serves as an incentive to ensure that the incident is genuine and not a false report. The first person to report an incident is called the First Reporter and can potentially earn rewards in the form of NPM tokens and stablecoins.
Once an incident is reported, other Neptune Mutual users can vote on the incident, either agreeing that the incident occurred or disputing it and calling it a false report. The first person to question an incident is known as the Candidate Reporter. At the end of the voting period, the stakes of the losing side are allocated to the winning side, with 60% of the tokens distributed pro-rata amongst voters based on the amount they staked. The remaining 30% of the staked tokens are burned, and 10% are allocated to the Final Reporter.
If the incident is deemed valid, the First Reporter receives 5% of the cover pool protocol stablecoin fees (that are charged on claim payouts and stake withdrawals - for details review our documentation). This incentivizes users and researchers to report incidents as early as possible and provides them with a financial reward for doing so. It also helps to ensure that incidents are resolved quickly, which can help to minimize any potential losses that could be incurred. This system rewards users:
- For being the first person to report a valid incident
- For being the first person to correctly dispute an incident report
- For providing fair and accurate feedback on other people's reports
Neptune Mutual supports both the Ethereum network and the Arbitrum, which allows users to choose the platform that best suits their needs. This means that users can report incidents within the Neptune Mutual app, whether they're using the Ethereum network or taking advantage of lower gas fees on the Arbitrum.
By offering support for both Ethereum and Arbitrum, Neptune Mutual provides users with more flexibility and choice when it comes to reporting incidents. Users can choose the platform that works best for them based on factors such as gas fees, transaction speeds, and network congestion.
The Role of the Neptune Mutual Association (CDefi)#
The incident reporting and resolution process on Neptune Mutual is designed to incentivize users to report incidents accurately and encourage truthful voting. The system is structured in a way that makes attacks on the consensus system both risky and expensive to carry out. Any users who make invalid reports will forfeit the NPM tokens they staked, which helps to ensure that false reports are minimized.
However, Sybil attacks are not the only issue that DeFi voting pools have to deal with. There is also the risk of the governance committee pausing the protocol or enacting an emergency resolution that reverses the decision made by the voters. To address this risk, the Neptune Mutual Association operates as a Centralized DeFi (CeDeFi) platform rather than a pure DAO. The association serves as a not-for-profit entity that oversees the incident reporting and resolution process, ensuring the normal operation of the marketplace and taking action only in the event of an attack or exploit.
The long-term goal of Neptune Mutual is to truly decentralize the protocol and turn it into a true DAO. Chairman Hans Koning has been an advisor to Neptune Mutual since the beginning and is working with the team to gradually make that goal a reality.
If you are interested in the DeFi space and want to protect yourself against smart contract security or custody risks, it's worth considering the DeFi cover pools offered by Neptune Mutual on both Ethereum and Arbitrum, as these provide an additional layer of protection for your investments and help you to minimize your risk in the volatile DeFi market.
