How Could a Decentralized Insurance Protocol Be Designed to Protect against 51% Attacks?
A decentralized insurance protocol could be designed using smart contracts on a blockchain. Users would pay premiums into a capital pool, and in return, receive a policy that covers losses from a confirmed 51% attack.
The protocol would need a reliable, decentralized oracle to verify that an attack, such as a deep blockchain reorganization, has occurred. Claims could be automatically paid out from the capital pool to policyholders once the oracle confirms the event.
The governance of the protocol, including setting premiums and validating claims, could be managed by a decentralized autonomous organization (DAO) composed of token holders.
Glossar
Smart Contracts
Function ⎊ Smart contracts are self-executing agreements with the terms of the agreement directly written into lines of code, residing on a decentralized ledger.
Decentralized Autonomous Organization
Governance ⎊ Decentralized Autonomous Organizations represent a novel framework for coordinating collective action, particularly relevant within cryptocurrency ecosystems and increasingly, financial derivatives markets.
Capital Pool
Function ⎊ A capital pool serves as an aggregated reserve of assets used to provide liquidity for trading operations within a derivatives market.
Insurance Protocol
Mitigation ⎊ Insurance Protocol within cryptocurrency, options trading, and financial derivatives represents a structured framework designed to curtail counterparty risk and systemic exposure inherent in decentralized finance (DeFi).
Decentralized Insurance Protocol
Coverage ⎊ A decentralized insurance protocol offers on-chain coverage against specific, predefined risks, such as smart contract exploits or oracle manipulation affecting derivative pricing.