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Risks such as flash loan exploits, hacks, and stablecoin de-pegging are a serious deterrent for DeFi adoption. Now Steady State is seeking to push DeFi out of the “fear zone” by insuring funds held on decentralized protocols.
Insurance for DeFi
Steady State is launching a comprehensive insurance solution for decentralized finance (DeFi). The project shifts responsibility from individual users, and the protocol holding the underlying assets, and transfers that responsibility to Steady State insurance. Theoretically, this should allow all parties to sleep more soundly at night.
Decentralized finance in its current form can never fully realize its potential: the risks from flash loan exploits, hacks, and stablecoin de-pegging mean that a large swathe of potential investors will simply never venture into the market. Any cursory examination of the sector makes it easy to understand why that is.
A single flash loan attack in February of this year drained $37 million from C.R.E.A.M. protocol tanking the price of its native token by 30% in half an hour. In May, flash loan exploits on a single chain, Binance Smart Chain, totalled $167 million. These sorts of reports effectively place a handbrake on the market, slowing its growth and making bigger investors and institutions turn away.
Without the additional safety that an insurance solution such as Steady State can provide, the growth of the sector will always remain underwhelming.
Steady State posits that insurance issued through smart contracts can help to create a more efficient and better solution for decentralized finance. Parts of the insurance process which are currently carried out by humans (with all their inherent biases) can instead be carried out logically with code.
Users can interact with the platform by first staking their assets as collateral, with Steady State using the capital to underwrite DeFi protocols. Users are rewarded for staking while simultaneously safeguarding funds.
The project operates on what is called a direct-to-protocol basis. According to Steady State, the use of their insurance coverage and index pools optimizes capital efficiency. Steady State sources liquidity in a novel way which they say cannot be accomplished with user-centric models.
All of this takes place in a community-centric environment, creating insurance policies that go beyond individual cover and instead cover multiple risk vectors for entire communities. Steady State has tagged this model “DeFi insurance 2.0”.
Building the Market
Steady State hopes that their approach to DeFi insurance will allow for the growth of a true risk market, inviting users to buy and sell collateral on a liquid secondary market. This will allow users to sell funds that may otherwise be locked up in insurance smart contracts. Over time it is expected that this form of collateral trading will help to further spread risk and make the ecosystem more robust.
This will, in turn, help to build the credibility of the DeFi market, inviting large investors and institutions to participate in a number of ways. Insurance could even be a strong primary driver of adoption, as an area in which institutions can see a path towards direct participation in the market.
If Steady State can create a solution which onboards existing DeFi users and attracts a fresh influx of capital from institutions and whales, the company could indeed be set to revolutionize the insurance industry.