A primer on the insurability of decentralized finance (DeFi)

Abstract

Decentralized finance (DeFi), a blockchain-based form of alternative financial markets, has gained significant public attention in recent months. Despite its relatively short history, DeFi offers a range of opportunities for designing and transferring digital assets. This establishes market structures that bear resemblance to traditional financial markets. Notably, the landscape of DeFi projects has expanded to include insurance protocols that offer DeFi-inherent mechanisms for hedging DeFi-specific risks, particularly those associated with smart contracts. These insurance protocols aim to provide similar value propositions as traditional insurance, namely the minimization and transfer of risks in exchange for a premium. However, it is crucial to acknowledge that most of these risk transfer protocols are strongly dependent on subjective expectations and decentralized governance structures. This article aims to develop a taxonomical understanding of DeFi insurance. Moreover, it seeks to assess the insurability of risks related to smart contracts. By doing so, this study contributes to the emerging body of knowledge surrounding DeFi insurance, paving the way for further research and analysis in this evolving field.