Crypto insurance is an important means of protecting your crypto assets and transactions in the highly volatile environment in which they operate. These insurance policies cover the loss of your virtual assets to theft or other potential losses and therefore are very important.
Cryptocurrencies are prone to high rates of thefts; about $3.3 billion worth of cryptos were stolen in 2021 and cryptos worth $3.8 billion were stolen in 2022. These figures stress the need to get your virtual assets insured.
Keep reading this article to learn more about crypto-insurance, how it works and why is it important in today’s world.
Crypto Insurance in Detail
Crypto insurances cover crypto holders, transactions on exchanges, and other service providers. It is aimed at protecting the assets and interests of crypto users.
Insurance policies are important to develop trust in the minds of the investors that they will receive compensation if they are failed by any unpleasant incidents.
Crypto insurance is slowly gaining popularity with the increasing popularity of the decentralized financial ecosystem.
As per the current trends, cryptocurrency exchanges are mostly covered by insurance policies, and individual crypto holders are only covered in the wake of hardware or software failure.
If the exchange or wallet where you have stored your tokens has failed, then you will be compensated only if the concerned exchange or wallet has invested in a policy.
What are the Different Elements of a Crypto Network that are Insured by a Crypto Insurance?
The crypto insurance policies cover the loss, damage, or theft caused by the different elements of a decentralized network such as smart contracts bugs, failure of the CEXs or DEXs, de-pegging of stablecoins against the US dollar, etc.
Since smart contracts are online applications, there is always a chance that they are affected by bugs, and the financial losses caused by such failures are covered by most crypto insurers.
De-pegging of a stable coin happens if the backing of such coins by the US dollar is withdrawn due to any market conditions.
Challenges of Crypto Insurance
While crypto insurance is very helpful to investors and other stakeholder institutions, there are certain challenges and risks associated with same.
For instance, crypto mining is a process of vast proportions involving expensive machinery and other prerequisites.
Since this equipment is human-made and can deplete in value over a certain period, when an insurance policy is made, such information is taken into account.
The problem with cryptocurrencies is that it is a new field, and such documents and information are scarce. So many insurance providers hesitate to insure such expensive equipment as it is hard for them to calculate the expenses.
The insurance providers are scaling up to accommodate the needs of large cryptocurrency exchanges and other service providers, but the insurance coverage of individual investors and token holders is still in the process of evolution.
The major challenge of crypto insurance is that there are very few players in the industry and therefore there is a lack of diversity in the policies offered.
How do Crypto Insurances Work?
Crypto insurances are offered either by traditional insurance companies that have accommodated the crypto markets to their purview or by other new-generation insurance companies that specialize in crypto insurance. Whatever the nature of the insurance provider, crypto insurance has a common pattern of working.
There are specialized insurance companies for the DeFi network that are also built on the blockchain network.
Unlike traditional insurance companies, DeFi insurance companies are not owned by a third-party insurance provider; they are owned by the stakeholders who benefit from the insurance schemes.
If a user wants to buy an insurance policy then they should have a stake in the protocol.
The downside of blockchain-based DeFi insurers is that the stakeholders can join hands together and vote for cases that are generally unfavorable to the whole entity.
So it is always better for large exchanges and other service providers to rely on traditional insurance companies rather than DeFi insurance.
Conclusion
Crypto insurance is an important prerequisite for anyone planning to try their luck in decentralized finance. It is an emerging field with very less options, but it is expected that the field will grow to cater to all the needs and use cases in the coming years.
