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.