Cryptocurrencies still belong to the high-risk asset class. From hacks to unexpected market crashes, there are numerous ways investors can lose their coins and thus their money. More recently, the collapse of the Terra network bankrupted numerous private investors. To protect investors from a total loss, various service providers such as opium finance or that InsurAce.io Protocol now offers insurance that covers certain risks. The following is a brief summary of the risks that investors can insure themselves against.
1.) Crypto Exchange Hack Protection
Most investors hold their crypto on exchanges like Binance, Coinbase, or FTX. Although the trading venues are considered safe and repeatedly emphasize that they are protected against various risks, investors can still protect themselves separately. The minimum sum insured and the term vary according to the provider and the asset.
For example, if a cryptocurrency exchange falls victim to a hacker attack the insurance kicks in and compensates investors if the Stock Exchange is unable to pay for the damage suffered by itself. In addition, some policies also include payment freeze protection.
2.) Stablecoin disconnect insurance
In the volatile environment of the crypto market, investors value stablecoins for their stable value. Cryptocurrency prices are pegged to another asset, usually the US dollar, and represent it in a 1:1 ratio. Consequently, decoupling from the underlying asset is catastrophic for stablecoins, as the recent example of the Terra UST stablecoin demonstrates.
But investors can also take precautions here to protect themselves against such a decoupling event. There is the possibility of taking out insurance against the decoupling of the underlying asset itself. If the stablecoin falls below a certain threshold (eg $0.92) for an extended period (eg 10 days), the insurance coverage kicks in and compensates the insured with compensation of 1 :1.
Due to the Terra debacle, these types of policies are in increasing demand: all stablecoin insurance is currently sold out at InsurAce. According to its own statements, the platform paid around 12 million US dollars to the victims after the Terra accident.
3.) Protection against hacks in smart contracts
Attacks on smart contracts continue to be the order of the day in the crypto space. More recently, the hack of the Ronin Chain, the blockchain behind Axie Infinity, made headlines. In total, the attackers stole more than $600 million in cryptocurrency.
To protect against loss through exploits and hacks, several crypto insurers offer policies that cover the exploitation of vulnerabilities in smart contracts. If the investor loses the cryptocurrencies stored in the smart contract in the course of a hack, InsurAce, for example, refunds compensation at the time of loss, minus any possible refunds through the smart contract protocol.
In addition, some insurers also offer individual packages in which various risks can be covered according to your own needs. The advantage: the insured has his insurance coverage grouped in a single contract. The disadvantage: in most cases, the minimum sums insured are significantly higher (with InsurAce, for example, from 500,000 US dollars).
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