DeFi Risk Transfer: Towards A Fully Decentralized Insurance Protocol

TL;DR

This paper introduces a fully decentralized, smart contract-based insurance protocol for DeFi that eliminates the need for external data, subjective assessments, and centralized intermediaries, aiming to improve efficiency and mitigate common risks.

Contribution

It presents a novel decentralized insurance protocol that operates without external data or subjective assessments, enhancing security and efficiency in DeFi insurance.

Findings

Protocol is formally described and implemented.

It effectively mitigates over-insurance and capital inefficiencies.

The approach is inspired by P2P insurance and CDOs.

Abstract

In this paper, we propose a fully decentralized and smart contract-based insurance protocol. We identify various issues in the Decentralized Finance (DeFi) insurance context and propose a solution to overcome these shortcomings. We introduce an economic model that allows for risk transfer without any external dependencies or centralized intermediaries. In particular, our proposal does not need any sort of subjective claim assessment, community voting or external data providers (oracles). Moreover, it solves the problem of over-insurance and proposes various ways to mitigate the capital inefficiencies usually seen with DeFi collateral. The work takes inspiration from peer-to-peer (P2P) insurance and collateralized debt obligations (CDO). We formally describe the protocol, assess its efficiency and key properties and present a reference implementation. Finally, we address limitations, extensions and ideas for further research.