Health, Wealth, and Happiness |
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“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”
- Benjamin Graham
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In today's issue: With all the losses of last year, one crypto segment should be doing very well: insurance.
Crypto insurance protocols seek to protect your investment by pooling money from customers and paying out when there's a problem.
Legendary investors like Warren Buffett and Charlie Munger built their fortunes by investing in insurance companies. We believe the same opportunities are coming to crypto. Read on.
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Premium Power-Ups
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By popular demand, our Future Winners Portfolio is a crypto-only portfolio for those who want to invest in the four tokens we believe will dominate the crypto industry.
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Must Read
Today's most important story for crypto investors.
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Some predicted the past few months would be the end of crypto.
They're wrong... Again.
Bitcoin has held firm at $21K for the last several days, recovering its pre-FTX price:
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One week in the crypto industry can feel like a year, so it may be hard to believe the FTX drama began only two and a half months ago, but after taking a brief beating, bitcoin has bounced back.
Investor takeaway: Bitcoin is back, baby. Once again, it pays to be a long-term blockchain believer.
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Sector Report: Insurance Protocols in 2023
by Anatol Antonovici
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Blockchain-based insurance protocols have managed to become an independent sector, even though their fortunes follow the overall crypto market. Nevertheless, demand for insurance services aimed at crypto products is expected to increase over the long term.
Conventional insurance is a $4.5 trillion market, with projections suggesting it could reach $224.34 trillion by 2028. While the industry is dominated by big players like Allianz, Prudential, and Axa, blockchain uses a new approach to protect against a wide range of risks.
Specifically, decentralized insurance protocols enable users to cover against multiple types of risks using blockchain-based smart contracts, with the networks being governed by the communities.
In this article, we'll discuss the most active decentralized insurance protocols and explore opportunities for long-term crypto investors.
Insurance Protocol Industry Overview
Insurance is one of the main use cases in decentralized finance (DeFi), the blockchain trend that aims to put all financial services on community-driven decentralized infrastructures.
At this point, insurance protocols hardly compare with larger DeFi subsectors like lending and decentralized exchanges (DEXes) in terms of market cap and total value locked (TVL). Still, insurance projects offer great benefits that could propel their growth in the years to come.
Thanks to blockchain’s unique features of decentralization, transparency, and lack of intermediaries, insurance protocols can address several key challenges of traditional insurance companies. For example, blockchain technology can be leveraged to reduce fraud, increase the speed of transactions, and improve risk management.
Judging by the performance of Nexus Mutual (NXM), Etherisk (DIP), and InsurAnce (INSUR) -- the native tokens of three popular decentralized insurance protocols -- the sector has suffered throughout the crypto winter. DIP and INSUR have dropped by over 90%, while NXM has lost more than 85% in 2022.
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DeFi insurance protocols can offer the same solutions as their traditional counterparts like auto insurance and health insurance. Decentralized insurance projects can also be used to protect against potential fund losses (due to hacks or bankruptcies) on both centralized and decentralized exchanges.
Top Blockchain Insurance Projects
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Investment Thesis
Today, most decentralized insurance protocols focus on insuring DeFi users by mitigating potential risks related to hacking attacks and other capital losses. This is a significant opportunity.
DeFi has experienced tremendous growth through 2022, attracting both retail and institutional investors. However, the rapid adoption of DeFi has led to an increase in protocol vulnerabilities. Hackers deprived investors of over $3 billion in 2022 per Chainalysis data from late October, which is close to the amount recorded in 2021.
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This increasing demand for protection from DeFi hacks means insurance protocols are expected to become a priority in the coming years thanks to an increase in demand for risk mitigation mechanisms.
Apart from the DeFi space, we also expect to see many insurance protocols focus on covering centralized exchanges like Binance and Coinbase, since these are essentially "blockchain banks" but without FDIC insurance.
Investors can get exposure to insurance protocols in different ways like buying the native token that fuels the ecosystem (like buying the stock), backing the team behind the protocol, or providing liquidity for insurance coverage.
Who’s Investing: Institutional Backing
There are a few major insurance protocols today. Most of them have secured capital from institutional investors or venture capital firms.
In the second half of 2021, Nexus Mutual raised almost $3 million from a pool of institutions that included Blockchain Capital, Collider Ventures, 1kx, Dialectic, 1Confirmation, Version One, and Delphi Digital (Collider, 1kx, and Delphi are also invested in Ease, another DeFi insurance solution).
Elsewhere, InsurAce secured funds from Singapore-based Signum Capital, Hong Kong-based IOSG Ventures, and HashKey.
**The infamous Alameda Research was invested in all insurance protocols mentioned above, but it filed for bankruptcy due to the solvency crisis experienced by its sister crypto trading firm FTX.
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Nexus Mutual (NXM)
Nexus Mutual is a DeFi insurance protocol that provides coverage for both DeFi and centralized platforms. Nexus’ flagship product is the Smart Contract Cover, which offers coverage for smart contract-related bugs and hacks.
Its newer products also help clients to protect against hacks and halted withdrawals on centralized exchanges or custodial wallets, as well as against failures in interest-bearing token depeg events.
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For example, in August 2022, crypto lending platform Hodlnaut announced it was halting withdrawals, token swaps, and deposits. Nexus members who had purchased Hodlnaut Custody Cover were protected against withdrawals being halted for over three months. In November, Hodlnaut Custody Cover holders started to file claims, and Nexus paid over $1 million to affected members.
The Nexus ecosystem is fueled by its native token NXM, which also acts as a governance token that gives holders voting rights in the Nexus Mutual DAO (like shareholder votes).
Nexus is currently the most sought-after DeFi insurance protocol, making it one of the best investment opportunities for those looking to get exposure to the DeFi insurance market.
While NXM is available on the native platform only, the Wrapped NXM version (WNXM) is available on centralized and decentralized exchanges. Only NXM members can wrap and unwrap the token on Ethereum. The price and performance of the two differ, but they show a high correlation.
Social Proof:
- Twitter followers: 41,100
- Discord members: 9,100
- Telegram: 2,400
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InsurAce (INSUR)
InsurAce was launched in early 2021 and has become the second-largest DeFi insurance protocol after Nexus. It's integrated with Ethereum, Polygon, Binance Smart Chain, Solana, and NEAR.
It protects users from common DeFi risks including hacks and smart contract bugs that may lead to token losses. It also offers protection against losses of assets held on centralized exchanges and wallets, as well as stablecoin depeg and IDO events.
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The InsurAce ecosystem is fueled by the native token INSUR, which also acts as the governance token. The token is used to reward members that provide capital to underwrite risks in the underwriting pool with INSUR tokens. Despite the bearish pressure, INSUR seems to be here to stay as DeFi and crypto market participants will continue to seek efficient solutions to minimize risks.
Social Proof:
- Twitter followers: 42,600
- Discord members: 6,300
- Telegram: 8,700
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Etherisc (DIP)
Etherisc was launched well before DeFi became a thing in 2020. The Ethereum-based decentralized insurance platform offers a wide range of insurance products including crop insurance, flight delay insurance, hurricane protection, crypto wallet insurance, and social insurance.
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The Etherisc ecosystem is backed by the DIP token, which is used for all transactions on the platform. To ensure a high standard of insurance services, service providers are required to stake DIP tokens, which can be forfeited in the case of non-performance.
DIP is trading near record lows at the time of this writing, but the token has the potential to recover thanks to Etherisc’s wide range of insurance products including those that mimic traditional coverage.
Social Proof:
- Twitter followers: 11,200
- Discord members: 516
- Telegram: 3,333
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Investor Takeaway
Decentralized insurance protocols offer a new approach to protect against a wide range of risks, especially those related to crypto transactions, crypto custody, smart contracts, and yield farming operations.
Since the sector is relatively new, the native tokens of insurance protocols can be more volatile and responsive to the general mood in the crypto space. Nevertheless, insurance will continue to be necessary both in DeFi and centralized finance (CeFi).
It may be too early to make large investments in this space, but it's worth keeping an eye on the leaders above, particularly Nexus Mutual (other notable mentions include Solace and Unslashed).
Warren Buffett famously made much of his fortune in insurance. Watch this space closely; the same opportunities are coming to crypto.
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ICYMI
In Case You Missed It
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No major insurance company covers crypto. That's an opportunity.
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Bitcoin Market Journal is a daily newsletter that makes you a better crypto investor. It's created by John Hargrave, Nick Marinoff, Steve Walters, Anatol Antonovici, Ben Burn, Preetam Kaushik, and Daniel Joel.
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