Fred Ehrsam, the co-founder of Paradigm, and Andrew Kang, an investor at Mechanism Capital, both say that DeFi insurance could become the next billion-dollar market.
A new niche market within Ethereum and DeFi might be dominated by two key players
In an essay, Ehrsam emphasized that the DeFi sector has grown from $500 million to over $5 billion in total value locked in 12 months.
Despite the rapid growth, there has been an absence of adequate insurance and other safety measures to prevent users from losing capital. He noted:
“DeFi has rapidly grown 10x over the last year from ~$500m in user funds to ~$5bn today. Money-losing bugs have occurred amidst this growth and the stakes are increasing. By enhancing trust, insurance can simultaneously enable DeFi to continue its rapid pace of iteration and grow its potential market size.”
Currently, the DeFi insurance market remains relatively untouched. Ehrsam mentioned Nexus Mutual in the paper, stating that its coverage grew from $0.5 million to $15 million.
Yearn Finance is the other major DeFi project that attempts to tap into the DeFi insurance market. Recently, the developer behind Yearn Finance released yinsure.finance, an insurance mechanism for DeFi users.
It remains uncertain whether YFI is surging solely due to its entrance into the DeFi insurance market. But, while the majority of major cryptocurrencies, including Bitcoin and Ethereum, fell steeply, YFI surged by 30% to over $12,000.
Ehrsam further explained in his paper:
“There are 2 empirical data points in crypto today. First, insurance for centralized crypto companies is in the high hundreds of millions to low billions. Second, one crypto-native insurance mutual with manual governance, Nexus Mutual, has grown from $0.5m in coverage a year ago to ~$15m today.”
Could insurance match the size of the oracle market?
Kang, who leads Mechanism Capital, said he expects the DeFi insurance market to evolve into the similar size as the oracle market.
Since June, oracle projects, like Chainlink (LINK) and Band Protocol (LINK), massively outperformed major and small-cap alternative cryptocurrencies.
“The size of the insurance market should be in the same magnitude as the oracle market. But insurance is 2-3% of the oracle market… There are 3 tailwinds here for the crypto insurance market cap. 1) Rerating of the assets involved as investors realize they missed this potential of this sector. 2) Continued explosive growth of $ in DeFi (much of which will require insurance). 3) Higher rate of $ insured”
The building blocks for the DeFi market are still being built, with oracles, insurance, and other critical solutions continuously evolving with the emergence of new technologies.