With the aim of offering an open and transparent solution to the public's financial needs, Decentralised Finance (DeFi) came into birth since , and soon exploded with a booming total value locked (TVL) reaching US$40 billion by 2021 March. However, DeFi has been under the ongoing threat of cyber attacks due to bugs in smart contract since its inception. Up to 2021 February, there is a cumulative loss of over US$14 billion as a result of those attacks.
As high return in DeFi attracting extensive teams building up thousands of DeFi protocols, only very few of them are launched with prudent pre-launch audit and examination, which leaves the main risk of assets security to the mass users of those protocols. Facing the threats of such hacks and exploits, De-Fi users are naturally looking to turn to insurance products, searching for protections of their assets. However, we have not seen efficient insurance coverage appeared in the traditional insurance market. As the history of De-Fi is very recent, the data available for actuarial analysis is limited, which is the main reason why such coverages are not offered by traditional insurance companies. With the rapid expansion of De-Fi products, it is foreseen the protection gaps of these newer risks will remain unfilled for a long time.
This is when a decentralised insurance platform steps into the play.
Nsure is targeted to be a platform for users to trade risks. We borrowed the operation model of Lloyd’s the London while designing the structure, because we aim to build a marketplace for users trading insurance risk comparable to Lloyd’s. With Nsure, information is transparent, and users are allowed not only to be outsourcing risk, but also becoming risk-takers, capital providers, governance actors and auditors of the system.
The challenge of forming an effective and efficient insurance solution against hacks to smart contracts is attributed to the difficulties in 1) modelling the expected losses, 2) handling claims of varied type of hacks, and 3) collecting adequate capital to support the underwriting while maintaining an attractive return to the capital providers. Nsure forms its solution by working out the design of capital model, dynamic pricing model, claim adjustment process, and rating system.
Capital is sourced from capital mining, with a decent return of Nsure tokens for the miners to ensure a continuous and solid capital support to the underwriting. Minimum Capital Requirement (MCR) is calculated based on the volume of each project and the correlation between them. A low MCR% (ratio of real capital to MCR) below a pre-determined threshold will result into a lock of assets in capital pool, so as to protect the solvency the business.
Rather than a single centralised entity setting up a premium rate, or individual capital suppliers and policy holders having to negotiate over premium terms, Nsure uses a Dynamic Pricing Model to set the price. In this model, capital supply and demand from the entire platform determines the price jointly similar to the pricing mechanism in the free market, by having Nsure tokens backing the policies bought. The price is self-adjustable to the movement of supply and demand, subject to the model, moderately stabilising the price change.
Nsure is a decentralized insurance platform. Unlike the centralized industry, where price is set by large corporations and a major portion of premium is paid to cover their internal costs, we can offer cheaper and more efficient premium since the impact from internal costs is much lower. Such advantage will become more obvious with the growth of the platform.
Both the determination of premium and required capital calls for the modelling factors representing the underlying risk level of listed projects. N-SCOSS, a rating system, is built to quantify the code security of projects by assessing 5 perspectives: 1) history & team, 2) exposure, 3) audit, 4) code quality and 5) developer community.
Claim assessment is performed by a decentralised decision-making process. To avoid abuse or manipulation of authority, claim assessors are randomly picked from those who have staked required amount of tokens. The staked tokens will be locked throughout the claim assessment process and will be burned if the assessor's decision on the claim is different from the majority. A challenge process and a public voting following a successful challenge further ensure the fairness of the claim assessment process.
The detailed coverage of Nsure policies is defined as in the document of Policy Wording.
For the first phase of the platform, products will be focused on providing coverage against the risk of hacks and other code-based exploits, involving smart contracts within the insured protocol. Additional, less-correlated products will be introduced, with the means of reducing correlated risk exposure to capital providers and stakeholders within the ecosystem.