DeFi TVL Surges Past $200B But Only 2% is Insured

The Intelligent Insurer #55: High yield opportunities in DeFi attract a larger audience and reinforce the need for insurance.

The impressive performance of the decentralized finance (DeFi) space in recent times has shifted the perception of digital assets. From a total value locked (TVL) of under $16 billion in 2020 to over $250 billion in January 2022, DeFi projects are receiving a lot of attention from investors. However, this massive growth has exposed investors to countless vulnerabilities, risking their assets, and limiting enterprise adoption of DeFi.

The latest Intelligent Insurer will expose the risks that DeFi investors face regularly and the lack of investor security products available in the space. We will also explore the growing need for more DeFi insurance products and the growth opportunities for the nascent industry. First, let's look at the progress we have made in the past week via our software development update.

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Insured Finance software development update

We made significant progress this past week thanks to stellar efforts from our dev team. We continued executing tasks in preparation of our mainnet release. Following last week’s audit and fixes based on feedback, we executed the following tasks:

• We prepped our smart contract scripts for mainnet deployment

• Retrieved API provider URL from the Polygon Mainnet network

• Set up Polygon network on hardhat config

• Optimized our smart contract functionality

In addition, we moved our existing testnet to a new subdomain. The URL app.insured.finance will be used for our mainnet release. We also addressed bugs highlighted from previous weeks. Users can now close popups by clicking anywhere outside of it. In addition, the sidebar within the app now opens by default.

As our mainnet release draws ever closer, we continue to test our platform rigorously for bugs and work to enhance features based on user feedback. We’re positive our next generation digital asset insurance platform will provide users with a secure and positive experience!

The DeFi explosion

DeFi protocols seek to address specific pain points in the traditional finance sector. Due to the massive benefits they provide to users, the DeFi space exploded in popularity in 2020. An increasing number of investors began speculating on this nascent industry, pushing the total value locked (TVL) in DeFi assets over the $1 billion mark early in 2020. Before the end of the year, TVL exceeded $20 billion, its then all-time high (ATH).

2021 saw the launch of several DeFi protocols and decentralized applications (dApps). The evolution of these protocols continued to pave the way for introducing more financial instruments. DeFi TVL shot through the roof, smashing ATH after ATH. It hit its peak during the November 2021 bull run, hitting $274 billion.

Shortly after the market crashed, the TVL fell below the $200 billion mark and is currently sitting at over $195 billion.  As of now, numerous DeFi protocols have become key parts of the DeFi ecosystem.

(Source: DeFi Llama)

However, the fast-paced growth of the DeFi space has drawn the attention of malicious actors in the industry, exposing investors to risks. What are these risks and how are they affecting DeFi adoption?

Investors face varied security risks

One of the risks that DeFi investors face is rug pulls. The perpetrators of this criminal act drive attention to their DeFi projects thereby attracting liquidity from several unsuspecting victims. Subsequently, they remove all users' liquidity from the platform, leaving investors with worthless tokens. Earlier in December 2021, the Avalanche blockchain experienced the largest ever rug pull in its history. Developers of the Shiba Inu competitor, SnowdogDAO, pulled $30 million out of the project.

Investors also run the risk of losing their funds due to technical flaws with the DeFi platform on which they conduct their trades. In September 2021, an anonymous Whitehat hacker revealed vulnerabilities within two smart contracts of the SushiSwap platform, jeopardizing a whopping $1 billion worth of customers' assets. Spotting these vulnerabilities is beyond the average DeFi investor, thanks to the highly technical nature of these projects. The best an investor can do is review the dev team’s credentials and hope the project’s smart contracts have been thoroughly audited.

Projects incentivize white hat hackers to highlight bugs via bug bounties. However, there’s nothing stopping a hacker from withdrawing cash from a project and ignoring calls to return funds. In such cases, investors are left holding the bag. In 2021 alone, the DeFi sector lost more than $1 billion worth of digital assets to hacks, with many incidents occurring at highly reputed platforms.  

Given the size of losses, it is quite shocking to discover that only 2% of the TVL in DeFi is insured. This figure is a dangerously low amount, considering the prevalence of hacks, technical flaws, scams, and rug pulls that are regularly besieging the DeFi space. 

More room for growth 

The DeFi industry is still in the early stages of its development. Although it has achieved a lot over the past three years of the market's existence, there is still enough room for growth. Between February 2020 and February 2022, it has gone from having a TVL of $1 billion to over $195 billion.

With the size and reach of the DeFi ecosystem expected to grow even more as the industry becomes more mainstream, the time has come for DeFi insurance to occupy centerstage. As more investors jump into the industry, insurance is set to become their primary need. Savvy investors will not invest their money in ventures that lack basic security, after all.

Asset insurance solutions like Insured Finance provide a means for users to secure tailored insurance for their digital assets. Such insurance solutions protect users against the various risks that can occur in the rapidly evolving DeFi industry. With these provisions, users gain confidence from knowing their assets are covered at all times.

About Insured Finance

Insured Finance is a decentralized, peer-to-peer insurance marketplace. Users can request customized insurance on a wide variety of digital assets, thereby ensuring full protection. Those fulfilling requests can earn premiums and earn a competitive return on their capital. Claims are fully collateralized and settled instantly.