Onchain Insurance 101 and the Crucial Role It Plays | Jeremiah Smith - OpenCover

[Music] hey everyone one 1212 is it on no is it on oh yeah you're good you're good yeah hey everyone um thanks for dropping by I'm Jeremiah co-founder and CEO at open cover I'm also one of the 280 lucky Souls that got wrecked by the USD uh Terra USD dpeg uh in 2022 and then got unwrecked because I had um dpeg insurance or more precisely dpeg um dpeg cover and there were about 300,000 USD or actually over 300,000 USD uh holders back then so less than one and a, had um had protection against dpeg back then in fact um less than 50,000 wallets have ever purchased onchain insurance so despite the despite the fact that offchain insurance is pervasive it's just everywhere uh on chain it's still relatively unknown and that's the reason why we founded our company to help folks uh stay safe on chain uh last year we covered over $200 million worth of onchain risk and this talk is really sharing what we've learned on our journey and how you can use uh onchain Insurance to reach your your own goals and of course before we dive in I do have to give a disclaimer insurance is a regulated term it's a regulated industry so many times um when folks say onchain Insurance what they actually mean is Insurance Alternatives alternative risk transfer mechanisms that um have the same purpose but are not regulated so the term for those is cover and so whether it's onchain insurance or onchain cover it's non-regulated counterparts the goal is the same which is transferring away onchain risk smart contract risk uh dpeg risk governance attack risks away from the end user and risk transfer has been massively important throughout history right it made oceans cities factories space even uh organizing this event safe bets and that's kind of what we've learned as humans in the last few Millennia that uh zero risk does not exist however if we mutualize risk if we share risk then uh we're able to achieve able to build um big things so zero risk does not exist offchain it won't exist onchain um that's why we have audits uh security tools best practices and all of that but really the role of insurance is to be that ultimate safety net when all else fails and this is critical it's a critical role in the sort of onchain safety stack because regular folks who don't care about t technology who are not here to gamble won't care that blockchains are more transparent faster Global programmable all of that if um they're taking significantly more risk onchain for things that they can do virtually risk-free offchain so we really need need to be able to provide that same type of safety net onchain as folks rely on offchain if we want a wider adoption and if you think of the main sort of overall overarching crypto risk it's really four categories right it's custody risk losing assets because a private key got compromised or stolen transaction risk which is typically getting tricked into signing a transaction um that seals your funds protocol risk which is placing funds in a protocol that gets hacked or somehow has a design failure and Asset Risk which is U mostly stable coin and wrapped asset um wrapped assets losing um their their Peg now if you we're talking about onchain risk specifically these are the risks that come from self- custodi assets and using onchain protocols to do things like swapping lending minting Etc and the main risks the things beyond your control that you need to worry about there are transaction protocol and Asset Risk and of course that's where onchain insurance onchain cover uh comes into play so if we start maybe with uh transaction um insurance which is an interesting one because it's sort of the least developed the newest of the three um yet we've seen very recently how important it is to take transaction safety seriously um for individuals the the main way to cover your transaction today is through a browser extension uh you'd want to do this obviously to avoid uh losing well signing transactions that you don't quite understand and losing funds in the process so for example this one is called pocket Universe it scans uh transactions before they hit your wallet and uh if they fail to catch a malicious transaction um you're covered up to 20,000 bucks if you're a builder or an institution you can also integrate transaction cover directly in your product or in your operations via an API which basically checks um transaction intents Compares them to simulated outputs and makes sure that those match um before they're actually produced on the blockchain so you can have that same sort of like transaction firewall principle um within a your own product or within your own orc uh this is something that we uh we were the first to um to offer and I think we might still be the the only ones to offer it but really it's a proactive way to keep your users and or your orc safe differentiate your product through safety and most importantly transfer actual or perceived liability uh in case uh there's an issue with one of the transactions that um they're assigned through your product or by someone at your org next up we have uh protocol uh insurance it's the most mature product of the three it's pretty straightforward whether you're an individual or a business you um purchase a policy on a given protocol for a given duration and if the protocol gets hacked or incurs a sudden and severe economic event you can then uh claim on your policy like for example a liquidation failure like Teddy was um um Teddy was talking about uh so here's an example of buying a 10,000 usdc um uh protection on the beefy protocol from Nexus Mutual for 30 days it will cost about 28 bucks it looks like um important to note that when you buy this type of product you need to be sure that you understand what the boundaries of the cover um the cover is is because of course in defi Protocols are composed they depend on each other so for example if you have a bey position that you want to cover you want to make sure that uh you purchase a policy that also covers the underlying yield uh yield protocols if you're a builder you can also uh cover your protocol on behalf of your users or to protect your users this is something that we see mostly in early days of a protocol and that is to attract uh tvl by making it effectively risk-free virtually risk-free to participate in the protocol as you build a a safety track record and here one interesting option is Sherlock who don't just do audits they also offer a sort of base level of uh protection um of protocol cover once you hit uh main net which you can increase I believe if you need more and then last but not least uh we've got deeg cover so same pretty straightforward uh you choose chose an asset you choose a cover amount you choose a duration and if the covered asset's market price goes below a certain percentage for a certain number of days you can claim on your policy so this is an example in our own product you can purchase usds a d cover and if usds goes below its dollar Peg um by n by 10% or more for more than S days consecutively you can uh claim on uh the policy so really the the only question left is how much do these cost I'll share this on Twitter later on um but basically transaction cover is typically single digigit bip on the value covered for a given transaction protocol cover can start at 0.15% of the value covered for one year of protection and can go up to 5% or even more in certain cases for newer protocols depending on the the underwriter and the um the actual protocol and then for de cover what we're seeing right now now is prices between 0.5% and 3.5% of the value covered for a year of um protection depending on the token all right I hope you enjoyed this um short primer uh on onchain insurance I'll post a summary table on X and if you want uh to chat more feel free to reach out there on Telegram and we also have a defi and risk learning group that we're organizing with Nexus mutual and Native highly recommended if you uh are thinking of becoming active in defi or you are already active in defi it's free to join and in the meantime if you have any immediate questions um I'd love to answer them and thanks for dropping by