Will the system flaws be compensated? Following the Flash Loan attack incident, insurance protocols based on DeFi are gradually gaining attention.

The recent flash loan attack has shocked the cryptocurrency community and prompted DeFi users to consider how to protect their assets. Insurance may be one effective way to reduce risks. This article will briefly introduce insurance protocols based on the DeFi sector.

• Nexus Mutual processes claims through a specialized team, with locked assets amounting to 13,000 Ether
• Opyn offers comprehensive insurance protocols covering technical, financial issues, and private key management

Latest Developments: Nexus Mutual has already paid out two claims totaling around $31,000. Founder Hugh Karp stated, "Unlike traditional insurance contracts, we only compensate actual losses, but regardless, user losses are a terrible thing, and I must prove that our mechanism can function properly."

bZx Incident Claims

Nexus Mutual is a solution based on Ethereum to prevent smart contract failures, primarily to reduce risks stemming from coding errors in smart contracts (e.g., DAO hack). Its locked funds have reached 13,000 Ether.

According to reports, a bZx loan user filed a claim with Nexus Mutual following the attack, but since bZx publicly declared all user funds were safe, Nexus Mutual's claims assessment team ultimately rejected the claim.

https://twitter.com/bzxHQ/status/1228787125740437504?s=20

Why Was the Claim Denied?

Primarily, Nexus Mutual relies on a claims assessment team to assess claims to avoid potential fraudulent activities. The probability of receiving compensation naturally decreases before the attack event is clarified.

Furthermore, Nexus Mutual's solution covers technical errors in smart contract code, not financial risks. Nexus Mutual also emphasizes:

Users have a higher chance of compensation if they wait for bZx to disclose event details before submitting a claim.

Comparison of DeFi Insurance Protocols

Nexus Mutual is the first widely recognized insurance protocol in the DeFi ecosystem. Opyn, its main competitor, entered the insurance field last week.

Opyn does not use a manual assessment process for its insurance structure but reduces risks for users through options contracts. Unlike Nexus Mutual, which only covers technical risks such as coding errors in contracts, Opyn covers a wide range of risks including technical (hackers), financial (liquidity shortages), and key management (custodian leaks).

For example, in the Compound DAI market where the utilization rate has reached 100%, lenders cannot use their funds, leading to a liquidity crisis. Option holders in Opyn can cash out with minimal losses pre-determined. Users can ensure the safety of their funds in case Compound or DAI collapses for any reason.

Additionally, if Compound's private keys are stolen, allowing hackers to steal funds from the contract, Opyn users can minimize risks.

Comparison with Traditional Insurance

Nexus Mutual aligns more with the traditional insurance model, using specialists for claims assessment and checking potential fraud. The difference is that traditional insurance companies can refuse coverage, whereas Nexus Mutual is fully open.

Opyn operates with options contracts to provide protection for users. Just like in traditional finance, the public cannot buy insurance for their stocks. However, through purchasing options, they can sell their stocks at a specific price.

As DeFi insurance protocols are still in the early stages, it is premature to compare them with traditional insurance. Following the bZx incident, there has yet to be an opportunity to prove the viability of their solutions. If these protocols can thrive in the DeFi ecosystem in the future, they may eventually realize their use cases in the real world.

Further Reading

• How did Lightning Loan arbitrage $360,000 in 13 seconds and how did they handle it afterwards?
• DeFi Lockup Funds Reach $1 Billion Milestone, Analysts: Mostly from Ethereum's price surge

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