DeFi World Often Experiences Hacker Attacks, Causing Investors to Worry. Therefore, the Insurance Solution that Can Mitigate DeFi Risks Continues to Be Discussed. This Article Provides a Quick Introduction to This Emerging Field.
(Table of Contents)
How Does DeFi Insurance Work?
Categories Covered by DeFi Insurance
Protocol Cover
Custody Cover
Depeg Cover
Yield Token Cover
Audit Cover
Slashing Cover
Bridge Cover
Excess Cover
What is Athena Ins?
What is ATEN Coin?
Despite bringing about a new revolution and many opportunities in the cryptocurrency market, decentralized finance (DeFi) has always had potential risks in terms of smart contract design and security monitoring. It’s not uncommon to hear about protocols being hacked and significant asset losses.
In this context, the provision of “user insurance” has been a topic of ongoing discussion. Although the entire field is still immature, Dynamic Zone leads readers to quickly understand the development of this area.
Unlike traditional insurance obtained from centralized institutions, DeFi insurance allows individuals to protect their capital from risks through decentralized liquidity pools. In exchange, insurance providers earn interest from the premiums paid, which are generated from locked capital, thus establishing a connection between premiums and protocol risks.
Insurance providers invest their funds in pools that generate higher returns than the risks associated with the protocols. This means that individuals trade event outcomes based on their estimation of the probability of potential risks. If a protocol covered by an insurance company suffers a negative event, such as a hacker attack, the funds in the pool covering that protocol will compensate the insurance users for that specific event.
The ability for anyone to participate and the transparency of on-chain operations are often emphasized as the main advantages of decentralized insurance systems. As DeFi continues to grow, the demand for solutions to protect user funds becomes increasingly important.
According to Three Sigma Capital, DeFi insurance can roughly cover the following categories:
Protocol Cover: Protects customers from potential economic losses when using DeFi protocols. Threats include smart contract exploits/errors, oracle failures or manipulations, economic design flaws, and governance attacks.
Custody Cover: Protects against financial losses that may occur when storing digital assets in third-party custody accounts (e.g., centralized exchanges).
Depeg Cover: Prevents depegging events, which occur when an asset loses its peg to the target currency. This form of insurance is widely used to protect stablecoins and other pegged assets, such as stETH.
Yield Token Cover: Prevents financial losses caused by the difference between the monetary value and the actual value of yield-generating LP tokens. To be eligible for claims, the depeg percentage (such as the Depeg Coverage Ratio) must exceed a designated threshold of the token value.
Audit Cover: Audit coverage is a form of protection that protocols can directly acquire to reduce the risk of vulnerabilities during audits. It adds an additional layer of security shortly after the audit is completed.
Sherlock pioneered this concept and provides up to $5 million in insurance for smart contract vulnerabilities after an audit. As long as there are no further changes to the codebase, this coverage can be activated at any time after the audit is completed. On the other hand, InsurAce has partnered with audit firms to offer a similar product with a three-month coverage period.
Slashing Cover: Provides financial protection to professional validators in Proof-of-Stake (PoS) chains who may face losses due to slashing events. Slashing events occur when validators violate the consensus mechanism rules, resulting in penalties, where a portion of their staked assets is slashed or reduced.
Bridge Cover: Cross-chain bridges enable the transfer of funds between different networks, but they also bring risks such as smart contract vulnerabilities, hacker attacks, and implementation or design flaws. These risks can result in inaccurate fund transfers or slippage calculations.
Excess Cover: Insurance providers can transfer a portion of their risk positions to other insurance providers, reducing the overall risk for the provider and allowing them to continue offering coverage for various risks without being overly exposed.
What is Athena Ins?
Yesterday, Decrypt introduced a new decentralized insurance protocol called Athena Ins. In the following sections, we will use this project as an example to provide a brief overview of its operation.
Athena aims to allow users to purchase insurance for their funds to avoid risks such as hacker attacks and stablecoin de-pegging when participating in DeFi activities. According to the official introduction, it has the following features:
Affordable insurance fees: Calculated based on an algorithm, allowing users to afford it.
Loss recovery assistance: Users are able to receive compensation in the event of asset losses.
Investment freedom: Users can choose insurance coverage and duration according to their preferences.
Sustainable returns: User premiums can generate interest.
It should be emphasized that Athena Ins is not yet officially launched, and the calculation method for the compensation amount, which is of most concern to users, remains uncertain. Finding a balance between user affordability and providing sufficient compensation will be a challenging problem to solve.
What is ATEN Coin?
ATEN is the native token of Athena Ins. In addition to maintaining the operation of Athena Ins, ATEN holders can also participate as governance participants in the Athena Ins protocol. Through democratic voting, they can influence the future development of Athena Ins. The token economics are as follows:
Total supply of ATEN is 3 billion tokens.
ATEN adopts a deflationary mechanism where, during insurance payouts, the deductible funds collected will be used to buy back ATEN tokens, which will be burned, thus maintaining supply restrictions.
ATEN holders can also participate in staking to receive additional tokens.
Overall, decentralized insurance protocols are still a very new field. This article provides a brief overview of the Athena service to allow readers to quickly browse its general framework. We hope to see more projects continue to develop in the near future, providing a safer and more secure DeFi world.
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