What Is Embedded Insurance and Why Adopt It in DeFi?

5 min read

Embedded insurance simplifies DeFi for users amidst its multiple chains, tokens, and layers.

From the perspective of an end user, one of the greatest obstacles faced by DeFi is the complexity of certain types of transactions. There are so many chains, tokens, and layers that it can be difficult for even experienced users to comprehend what's going on behind the scenes. This is illustrated by the purchase of asset protection, but embedded insurance aims to simplify this process.

What Is Embedded Insurance?#

Embedded insurance refers to the concept of combining the acquisition of protection for a digital asset or token with the purchase of the asset itself. This is achieved through a dApp, Web3/Metaverse project, or centralized exchange, streamlining the entire process of buying coverage. The objective is to offer a more seamless experience to users of DeFi liquidity pools by making it easier to purchase cover.

One of the challenges that DeFi providers face is resolving the technical aspect of this process. In order for DeFi platforms to operate effectively, they require two primary features: scalability and composability. While much has already been done in terms of scalability with the introduction of Layer 2 solutions such as Bitcoin's Lightning Network, or Arbitrum for Ethereum, composability remains a challenge as so many new chains (and side-chains) launch, but the groundwork is there for interoperable, powerful DeFi solutions.

What Is Composability?#

Composability refers to the capability of freely and seamlessly combining multiple dApps, enabling end-users to perform all the desired functions in one application. For a DeFi solution to be composable, it must have two properties:

  • Standardization
  • Atomicity

To facilitate efficient communication between DeFi apps, standardization is necessary. However, implementing standardization in a community that values decentralization as a fundamental principle can be challenging. Despite the obstacles, standardization is already being adopted in certain areas of the DeFi space. For example, the Enterprise Ethereum Alliance has a working group to agree standards for smart contract security audits. This group was founded to improve smart contract security after several major DeFi hacks.

Several popular DeFi platforms provide their API details, making it relatively simple to locate third-party DeFi API Connectors for developers who may not want to invest time in writing their own.

Atomicity is the ability to connect apps instantly and within one transaction. This makes atomic swaps possible, where tokens can be swapped on a decentralized exchange without the need to trust the person or the exchange. In some cases, atomicity is sacrificed in an effort to improve scalability through side-chains or sharding. Projects like Cosmos and Polkadot are working on creating "bridge chains" that allow different blockchains to communicate with each other and solve these issues.

The problems related to scaling, interoperability, and atomicity are complex, and there is no single solution that can address all of these issues. Each of the current proposed solutions entails certain trade-offs, and the subtleties of each potential solution are a matter of intense debate amongst blockchain developers.

For individuals primarily interested in ERC-20 tokens and DeFi projects, composability is a somewhat simpler subject. Smart contracts exist on the blockchain, and Arbitrum has emerged as a popular Layer 2 scaling solution, making fast and atomic transactions relatively straightforward to execute.

It offers various other advantages:

  • Enhanced retention: It is beneficial to retain users within your application by offering all the features and services they need, instead of letting them leave your platform, which may lead to distractions or the use of a different provider for their trade or purchase.
  • Improved security: Consolidating everything within one application reduces the risk of users falling prey to phishing attacks, spoofing, or fraudulent websites.
  • A smoother experience: By allowing users to make trades, track staking, and perform common tasks in a single place, you can reduce friction and save their time.
  • Improved visibility: As a developer, integrating products like Neptune Mutual SDK can increase the visibility of your pools and assist in building the liquidity required for success.

Developed with Typescript, the Neptune Mutual SDK is user-friendly and straightforward. If you wish to integrate the Neptune Mutual cover pool into your own dApp or website, you can easily add a few lines of code to access the cover pool's functionalities directly from within your existing project website or dApp.

How Microtransactions Could Facilitate Embedded Insurance?#

Developers and DeFi pool operators face a challenge of fees when making their pools accessible to a wider audience. In high-fee environments, which are common for pools operating on base layers, it's only worth participating in DeFi staking if an individual has a substantial amount of capital.

The availability of low fees and faster transaction speeds on Layer 2 solutions like Arbitrum makes it possible for more individuals to participate in liquidity pools and easily purchase cover. With the ability to charge a small transaction or protocol fee for each operation on their platform, developers can direct these fees to the cover pool. This method can increase the capacity of the cover pool liquidity passively and provide an additional revenue stream to the platform through the fees paid by policy purchasers.

Embedded Insurance Boosts Confidence#

Integrating embedded insurance into your dApp can increase users' confidence in investing and trading. Leveraging the composable features offered by various platforms through APIs and utilizing the Neptune Mutual SDK can enable the incorporation of automated investments with scalable cover as the user's funds increase.

DeFi exploits are a risk for everyone, including developers who may face the risk of having their private keys compromised. Therefore, parametric insurance cover can help provide users with a sense of security knowing that their assets are safeguarded.

If you're working on a new dApp or CEX and you'd like to offer parametric insurance to your users, contact us today to learn more about our cover pools and the Neptune Mutual SDK.