Insurers Come to Crypto's Wild West Promising 50% Plus Returns – Bloomberg

Adventurers in what is perhaps the most lucrative and risky corner of the cryptocurrency world are starting to see a bit of a safety net.

In the past year, scores of investors big and small have poured billions into decentralized-finance applications that allow users to lend, borrow and trade crypto without intermediaries like banks. While the DeFi sector is booming, it has also been plagued by hacks, fraud and a copy-and-paste coding culture where a modified app can siphon away users from an established rival.

Now software developers are launching products that claim to reduce the risks by selling something akin to insurance coverage. But here’s the catch: They’re also DeFi apps.

Unlike insurance offered through the likes of Lloyd’s to custodians and large crypto exchanges, these apps — which run on digital ledgers called blockchains — let any investor buy coverage. They also allow anyone to form investment pools to provide coverage — often promising annual returns of at least 50%.

Here’s how it works. Investors typically decide to offer coverage for a specific DeFi app, or vote on which DeFi apps everyone’s money should go into covering. That means a chance to get rich, or to lose everything by making the wrong bet.

“Definitely do your own research and buyer beware,” said Mike Miglio, chief executive officer at Bridge Mutual, which is planning to launch a DeFi insurance app. “That is the true nature of what DeFi is supposed to be.”

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But this dis-intermediation of insurance companies could also potentially undermine the very promise of insurance.

“The main missing ingredient is risk reduction,” said Aaron Brown, a crypto investor and writer for Bloomberg Opinion. “A pure financial contract doesn’t do that, and I don’t see how a decentralized entity can underwrite.”

Typically, the DeFi insurance apps are highly automated: All transactions happen via self-executing software programs known as smart contracts. And like most DeFi apps, the new insurance ones are also at the risk of being hacked.



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