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Coverage Protocols

According to ImmuneFi’s report, in 2021, over 2 billion in crypto assets were lost to smart contract exploits. Although that sounds alarming, it only stressed the importance of Coverage protocols in this growing ecosystem.

Traditional Coverage Protocols

Coverage’s traditional analog is insurance, and operates in a very similar way:

  1. Purchase a policy of x days for y coverage

  2. Pay a premium to the protocol based on X and Y

  3. If a loss event occurs within that time frame submit a claim and receive reimbursement

This is a very straightforward and traditional model. The main difference is that the collateral for this coverage is provided by anyone who wishes to participate. Risk providers stake assets against various protocols that are eligible for coverage. In return, they receive a cut of the premium. In the event of a hack, that stake of assets provides the collateral to affected policy holders. This method makes coverage provision a community based effort. For example, unsafe protocols will not receive any staked collateral, preventing the purchase of coverage policies.

Types of Coverage

The most common type of coverage provided by these protocols are the following

  1. Smart Contract Risk

    1. Smart Contract risk commonly protects the user from any exploit in the code of a smart contract user that results in the loss of funds

  2. Token Coverage

    1. Token Coverage usually provides stacked risk against all underlying protocols.

  3. Stablecoin Coverage

    1. Stablecoin Coverage will provide a payout in the event of an extended depeg event below a certain threshold

Ease Uninsurance – A DeFi native coverage model

Beyond traditional coverage providers is the emergence of Ease’s new model of Uninsurance. This ecosystem operates differently than the traditional model described above, most importantly:

  1. No contracts. The system supplies coverage for as long as the assets remain there.

  2. No premiums. Therefore, users only pay when a hack occurs.

  3. No proof of loss. Reimbursement occurs automatically to affected users.

This new model provides a lower cost to the user because it does not need collateral staked by “risk providers”. Instead, the collateral are the deposited funds themselves. In the event of a hack to one token, partial liquidation occurs to distribute the loss proportionally. For more information see How do DeFi Insurance Alternatives Work.

Why user Coverage Protocols

As Immunefi’s report shows (Immunefi’s Top Hacks in 2021), the DeFi space is not without risk. Moreover, this report stresses the necessity of engaging with the ecosystem safely. While DYOR is the most important tool in an investor’s arsenal, the final defense is covering your assets. With the advent of Ease’s new uninsurance, coverage is now easier and cheaper than ever.

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