How Do Decentralized Insurance Protocols Offer a Hedge against Smart Contract Exploits?

Decentralized insurance protocols allow investors to purchase coverage against specific risks, such as smart contract exploits or stablecoin de-pegging. This coverage acts as a financial hedge, mitigating the risk of catastrophic loss of capital.

By transferring the exploit risk to the insurance protocol, the investor reduces the overall risk premium associated with the staked or deposited asset, which can be factored into a lower discount rate for valuation.