As Hacks And Theft Becomes More Sophisticated, Projects Turn To Crypto Insurance To Assuage Concern
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Hackers and thieves only keep changing up their strategies as cryptocurrency becomes more popular.

Crypto platform Roll saw about $5.7 million stolen from a hot wallet in March. At the time, team members did now know how the hackers managed to obtain the private key.

In late April, Binance Smart Chain-based Uranium Finance fell victim to thieves who exploited a bug in the smart contract. They managed to drain more than $50 million after swapping a single token for just about every other coin in the liquidity pool.

In the middle of the month, a blog post from Polygon Network-powered DeFi project EasyFi revealed a hacker managed to grab at least $80 million after exploiting private keys to the admin MetaMask account.

Across 2020, hackers managed to exploit DeFi protocols 17 times and stole a total of $154 million (though two thefts came at the hands of the founding team performing an exit scam).

In light of hacks, thefts and exit scams, many crypto users are understandably wondering how they can better secure their funds and find protocols that emphasize security and transparency.

One way is through crypto insurance that charges an annual premium based on the amount of covered assets. Due to demand, the Marsh & McLennan insurance firm formed a team of 10 just to handle insurance for blockchain startups.

Another large insurer, Aon, remarks some insurers have been adding crypto insurance to general policies. However, according to American Express, there is only about $6 billion in available insurance coverage for a crypto market capitalization that has surpassed $2 trillion, as of late April 2021.

Crypto Insurance: Often Easier In Concept Than In Practice

Crypto-related insurance has been a tricky endeavor. Since most insurance premiums are based on past data, it can be very hard for insurers to engage with a (new) cryptocurrency market and decentralized finance world.

Volatility also impacts insurance coverage because it can reduce the number of coins being insured. Additionally, insurers have also expressed skepticism at the lack of regulatory oversight into the crypto and blockchain world.

As a result, crypto insurance options currently function as bespoke services that are tailored to fit client needs. The decentralized cross-chain asset management platform Cook Protocol utilizes Nexus Mutual to insure the entire protocol and all user funds. It also offers fund-specific insurance options for those interested in further hedging against risk.

Cook Protocol users can tap into the rapidly-growing crypto asset management market by selecting investment choices offered by fund managers. Funds can be managed actively or passively and investors receive a unique LP token proportional to their contribution into a fund. These tokens can be divested at any point to receive the equivalent underlying asset.

Nexus Mutual is a blockchain-based insurance solution where people can share risk without the need for a centralized insurance company. Members decide on claims. Payments are enforced by a token-driven economic incentive structure. Token holders can use them to purchase cover and participate in claims assessment, underwriting and governance.

The Future Of Security And Transparency, And The Role Of Crypto Insurance

Cook Protocol is one of the few DeFi protocols that have engaged with an insurance company to protect user funds. The team believes their cross-chain platform should have an emphasis on security and transparency. All transactions on the protocol are open, which means investors are always aware about what their funds are being used for.

As more platforms take steps like Cook Protocol has done to secure user funds through crypto insurance and promote transparency, it will become more challenging for hackers and thieves to work.

While research from last year does show attacks against DeFi projects (like Cook Protocol) are up, overall losses from crypto fraud, thefts and hacks was down to $1.8 billion for the first ten months of 2020. Those numbers, according to CipherTrace, are far less than the $4.5 billion pilfered in 2019.

As more crypto users ask for projects to promote transparency and security, the influence and scope of the crypto insurance market should continue to grow.

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