Hello everyone, I am Mr. K, and what we are going to talk about today is: "What is the insurance in DeFi?"

We all know that in the traditional financial world, in addition to lending, funds, and exchanges, there is another field that is closely related to us, that is, insurance and DeFi. As the reflection of the financial field in the decentralized world, the insurance business is naturally Indispensable, so today Mr. K will tell you what is going on in the insurance field in DeFi?

In traditional finance, we often need to purchase insurance in order to prevent certain risks, such as car accident insurance, personal safety insurance, and so on. The so-called insurance in DeFi, like traditional insurance, also has the function of preventing risks, but it is aimed at some common digital asset risks in the decentralized world, such as theft of private keys, hacker attacks, and manipulation of smart contracts. wait.

DeFi insurance refers to an insurance agreement based on a type of smart contract that cannot be tampered with and enforces automatic execution.

To put it simply, in the traditional insurance business, you need to find a third-party insurance company and pay the corresponding fees before signing an agreement with it. Then the insurance company will provide guarantee, and once there is something in line with the agreement, the insurance company will make corresponding claims. It can be said that the entire process is a business derived entirely around third-party insurance companies.

And DeFi insurance is to remove this centralized insurance company, write a type of smart contract by code, and perform the function of insurance execution alone. So DeFi insurance is more like an execution tool written by code.

But this creates a new problem! The essence of insurance lies in the transfer of risk, from those who are unwilling to bear the risk to those who are willing and able to bear it. In the traditional insurance business, third-party institutions are naturally the bearers of risks, but because DeFi insurance is decentralized, who can bear this risk?

Let's talk about how DeFi insurance works:

The business logic of DeFi insurance is very different from traditional insurance business. At present, mainstream DeFi insurance adopts the form of mutual assistance. It uses a decentralized user organization to replace the insurance company to undertake the responsibility of guarantee.

DeFi insurance, like normal insurance companies, will guarantee many projects, and each project will have a corresponding claim settlement fund pool, which anyone can join.

As long as someone puts funds into the corresponding fund pool, this person will become the guarantor of the project. Once the project has a risk of being hacked or a project bug, everyone in the fund pool will jointly bear the risk and settle the claim .

Although the guarantor bears the risk in this process, it will also obtain higher returns correspondingly. As long as a user purchases DeFi insurance for a certain number of days, everyone in the fund pool will be able to share the corresponding insurance premium and obtain income.

In the whole process, the smart contract program performs audit, claim settlement, fund lock and release and other execution tasks. Therefore, it is not so much DeFi insurance as it is a peer-to-peer insurance organization.

Generally speaking, DeFi insurance is indeed a major financial innovation. It opens up a new way of thinking. Perhaps, with the development of the times, one day in the future, insurance companies will really be subverted. Can replace this role and jointly bear the risks and benefits of insurance, let us wait and see~

Thanks to Xu Yinglong for his help and guidance on the content of this episode.

Sina Weibo: @许英龙_sun1y

- END -