How Do Decentralized Insurance Protocols Offer Coverage for Smart Contract Risks?
Decentralized insurance protocols allow users to purchase coverage against specific smart contract risks, such as an exploit or hack leading to a loss of funds. The coverage is provided by a pool of capital contributed by underwriters (stakers) who are incentivized by premiums.
If a claim is filed and approved by a decentralized claims assessor (often a DAO vote), the stakers' capital is used to pay out the claim. This peer-to-peer model replaces traditional insurance companies with a risk-sharing community governed by token holders.
Glossar
Insurance Protocols
Mitigation ⎊ Insurance protocols within cryptocurrency, options trading, and financial derivatives represent mechanisms designed to curtail systemic risk and counterparty exposure, functioning as a layer of financial security beyond traditional collateralization.
Coverage
Scope ⎊ Coverage, within cryptocurrency, options, and derivatives, denotes the extent to which a trading instrument or strategy replicates the price movement of an underlying asset or benchmark.
Decentralized Insurance Protocols
Operation ⎊ Decentralized Insurance Protocols function by automating the entire lifecycle of an insurance contract, from premium payment to claim settlement, using immutable smart contracts.