DeFi Insurance Is Dead: Long Live DeFi Insurance

Plenty of people wrote off DeFi insurance. The first generation of insurance protocols gave them reason to. A wave of cover providers rushed in to protect onchain capital, and many collapsed under risks they didn’t have the expertise to underwrite.

While every other DeFi insurance protocol from that era died, Nexus Mutual survived. We covered crypto risk through every cycle, improved our data and risk management practices, and redefined the DeFi insurance category with lessons learned from each loss event. 

The cover you buy today looks almost nothing like DeFi insurance 1.0. Here's what changed, and where the industry is going next.

DeFi Insurance 1.0

The first wave of DeFi insurance builders were ambitious and technically creative, but underwriting digital asset risk was a brand new challenge. Correlated smart contract risk, depeg risk, and custodian failure are hard to price, and DeFi infrastructure at the time was fragile. There were hundreds of hacks in the early days of DeFi, but the first industry-wide stress test came in 2022 which saw Three Arrows Capital blow up, the Terra/Luna implosion and UST depeg, and FTX failure, ultimately leading to tens of millions in claims. Many providers didn’t recover due to poor internal risk management practices.

Nexus Mutual stayed within our risk limits and continued operations without issue. We paid over $4.9 million on FTX alone, and came out the other side ready to improve our products.

DeFi Insurance 2.0

Four structural issues defined DeFi Insurance 1.0: inefficient capital, low trust in claims, correlated risk, and weak distribution. 

Capital Efficiency

While other protocols fragmented their liquidity across multiple chains, we have always run a single, unified Capital Pool, allowing all of it to stand behind every cover we write.

Pooling the capital is just step one. Traditional insurers earn investment income on the float, and that yield is one of the main reasons they turn a profit. Nexus Mutual does the same. We started by investing a portion of the Capital Pool in Lido's stETH in 2021, earning staking rewards while staying long ETH and liquid enough to pay claims. The Investment Committee has actively managed the allocations ever since (for the most recent investment information, see the newsletter here).

We also rebuilt the way members move money in and out of the Capital Pool. In 2023, after a healthy community debate over reliably exiting the Mutual, we launched the Ratcheting Automated Market Maker (RAMM). This innovation provided an automated and dependable way to mint and redeem NXM so people could easily enter and exit the Capital Pool, and it also automated buybacks at the same time.

From managing and leveraging capital to facilitating liquidity, we’ve been laser focused on capital efficiency since the start.

Claims You Can Trust

At the end of the day, holders care about one thing: will I get paid? The first generation of Defi insurance protocols relied on popular voting from token-holders, which particularly for institutional buyers, created a bit of a trust issue. Can I rely on these anonymous people online to honor my claim?

In response to this feedback, Nexus Mutual rebuilt our claims process from the ground up. We replaced open voting with a specialized Claims Committee composed of experts who assess the evidence and transparently decide each claim. Some products can even be structured with a third-party assessor, providing the same standards institutions are used to. 

Knowing who assesses a claim and how the process works is the difference between knowing your claim will get paid, or just hoping it will.

Friction-Free Cover

DeFi Insurance 1.0 treated cover as a standalone product. Depositing into a protocol is one step: protecting your assets is another. Nexus Mutual moved cover into the deposit flow instead. 

OpenCover’s Covered Vaults take it a step further and build it straight into the product. Launched in partnership with Nexus Mutual, Morpho, Utila, Gauntlet, and 10+ other partners, Covered Vaults are a new primitive that allow for any vault to be covered, without any changes to the underlying vault. Embedding cover directly into vaults is a trend that’s only growing in popularity.

On the institutional side, as these buyers started representing a larger part of the cover buying market, the solutions had to scale with them. To date, Nexus Mutual has underwritten more than $350 million in Fund Portfolio Cover for DeFi hedge funds. 

Unmatched Digital Asset Underwriting Experience

With every exploit, the industry got better at understanding and underwriting onchain risk. As the first ones here and the last ones standing, our dataset on DeFi risk is as thorough as it gets. Protocol risk still comes down to experienced underwriting informed by a robust dataset, and that’s what Nexus Mutual has spent years building.

Having that edge matters more every quarter because AI is reshaping the threat. Security has always been asymmetric, since a defender has to close every gap while an attacker needs only one opening. AI is making it harder by the day. That’s why it’s never been more important to work with partners who have the experience to really understand DeFi risk, underwriting new risks as soon as they appear.

Where DeFi Insurance Goes Next

For DeFi to scale and bring TradFi onchain, DeFi insurance needs to scale with it. That means having both onchain and offchain capital available to back DeFi risks.

To drive onchain capacity, Nexus Mutual has partnered with Symbiotic, a universal staking protocol, tapping restaked capital to deepen underwriting capacity across more protocols and asset classes. On the offchain side, we’re building connections to standard insurance capital and exposure, with products like the Real-World Insurance Vault, a USDC-denominated vault that backs regulated, real-world insurance products.

The next generation of cover pairs onchain risk expertise with traditional balance sheets, and Nexus Mutual is building that bridge now.

Long Live DeFi Insurance

DeFi Insurance 1.0 is dead. 

The providers who never had the risk expertise, capital design, claims trust, or distribution didn't survive contact with a real stress-test. Nexus Mutual has outlasted them, built a better protocol with more comprehensive products, and kept going.

Whatever comes next, there’s one thing you can count on: Nexus Mutual will be there to keep you covered.