A Deep Dive into How Fairside Network Solves Current Issues in the DeFi Insurance Space
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A Deep Dive into How Fairside Network Solves Current Issues in the DeFi Insurance Space
DeFi insurance is the most vulnerable sector in the cryptocurrency space, and if you don't understand the risks associated with DeFi insurance, you're unlikely to receive any insurance claims.
Navigating Web3 tides with focused insightsWritten by: Momentum 6
Compiled by: TechFlow
DeFi insurance is the most vulnerable sector in the cryptocurrency space—if you don't understand the risks associated with DeFi insurance, you're unlikely to receive any insurance claims.
In this article, we'll expose you to the Wild West of DeFi insurance and offer you a viable alternative.
WHAT IS DEFI INSURANCE?
DeFi insurance works similarly to traditional insurance—it protects individuals from financial losses caused by adverse events such as hacks, vulnerabilities, smart contract bugs, etc.
Individuals looking to avoid losses on DeFi platforms can purchase DeFi insurance.
If they lose funds, they can file a claim through a DeFi insurance protocol for a specific payout amount. However, individuals must pay premiums based on various variables (such as policy duration, type of exposure, etc.).
HOW DOES DEFI INSURANCE WORK?
In DeFi insurance, liquidity providers lock capital into various liquidity pools known as "capital pools." Individuals offering coverage can freely choose which protocols they want to cover. Existing DeFi insurance protocols aim to cover specific DeFi risks—typically smart contract failures or exchange hacks.
This is achieved by staking assets in specific projects, but this method puts the entire stake at risk if the project fails. Providers earn interest based on the amount of capital locked in the pool, funded by premiums paid by customers of the DeFi insurance protocol.
THE WILD WEST OF DEFI INSURANCE:
Given that smart contract attacks have caused around $2 billion in losses this year, insurance has become a necessity in the DeFi world. Yet, few DeFi insurance protocols can solve the insurance problem sustainably.
Current solutions create a zero-sum game by shifting one investor’s misfortune onto another.
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Risk: Since stakeholders bear the cost of claim payouts, projects cause permanent loss of staked assets when claims are paid.
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Capital Efficiency: Insurance staking involves securing coverage for a specific project desired by liquidity providers. Capital efficiency in project pools is very low because fully collateralized positions are required to provide coverage. Therefore, the likelihood of insolvency is high. Providing insurance at a 1:1 ratio is dangerous for stakeholders—a single claim could lead to complete liquidation.
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Rewards: Returns come only from insurance purchased within that pool and are shared among a large group of asset-staking stakeholders. As new stakeholders enter the pool, returns for liquidity providers decrease—yet their risk exposure remains unchanged.
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Coverage: DeFi insurance is created for specific projects over specific time periods and covers only certain events. Thus, policyholders must purchase multiple policies and pay multiple premiums for different risks.
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Claims: Insurance claims are determined by equity-based voting mechanisms. If you vote unfairly, you get liquidated; if you vote fairly, you still get liquidated due to claim payouts. Moreover, most votes on insurance claims are 100% in favor of paying or not paying—but in a DAO with proper incentives, voting should never reach 100% consensus.
A VIABLE ALTERNATIVE:
FairSide's approach to addressing the lack of insurance in crypto is—non-insurance. It is an open network with no restrictions on membership.
FairSide Network aims to develop a decentralized, sustainable model by adopting proven business models from traditional insurance. FairSide’s insurance model spreads risk across many domains to ensure the potential negative impact of any single variable is limited.
Funds are locked in smart contracts and can only be unlocked through community consensus voting. Any member who suffers unfair treatment due to crypto asset losses can turn to the community for help.
Operating as a DAO, FairSide members pay membership fees and gain access to cost-sharing benefits for future cryptocurrency loss events.
If so, cost-sharing will be automatically distributed from the capital pool to recipients’ wallets via smart contracts. The network will rely on community participation to determine which types of losses are included or excluded—but how does FairSide solve the problems of DeFi insurance?
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Risk: Network staking diversifies risk across the entire network. With no direct ties to specific projects, paid claims result in minimal temporary losses for stakeholders.
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Capital Efficiency: By decoupling assets from any specific project or loss type, network staking achieves 10x capital efficiency. Low correlation of risks improves capital efficiency, increases staking returns, and provides the broadest coverage.
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Rewards: Network staking earns rewards from all members seeking insurance. As new stakeholders join, 85% of rewards are allocated to prevent dilution.
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Coverage: Members need only one membership to receive full insurance for all approved loss types. Once a loss type is approved by the community, it is automatically included in the membership.
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Claims: Network staking allows voting on loss events rather than individual claims, producing the fairest outcomes. In this system, the community votes to approve claim events to qualify for cost-sharing benefits. Contributors are not liquidated when losses are paid.
Although the DeFi insurance space is still in its infancy, many protocols are working to develop innovative strategies to protect users' assets.
For those seeking compensation for cryptocurrency losses while paying premiums, FairSide appears to be a viable option.
However, other DeFi insurance protocols still have many unresolved issues.
Therefore, it is not recommended for ordinary people to insure their crypto assets, as even if they pay premiums, they may not receive any compensation for losses!
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