An insurance for Defi deposits on Compound arrives

Insurance has finally arrived in the world of decentralized finance (DeFi). Or at least on the Compound protocol, the collateralized loan platform based on Ethereum technology.

The new product, supplied by a company called Opyn, allows you to choose options on stablecoin deposits, giving users the ability to protect themselves from the risk of a catastrophic event that leads to the loss of Compound records.

Defend yourself against risks in DeFi

The decentralized network may have reduced the need to rely on intermediaries, but this does not mean that there are no risks.

Kyle Samani of Multicoin Capital told the Coin Desk news site that one of the advantages of DeFi is the ability to run multiple applications together without requiring authorizations. But this characteristic could also be turned against him.

"There is certainly a non-trivial amount of risk in the ecosystem, as many smart contracts are significantly subject to bugs or attacks," said the founder of the autonomous cryptocurrency fund Arianna Simpson.

She claims that the industry has been working on this challenge for some time, citing Nexus Mutual as a company that already provides smart contract insurance services.

The first insurance on crypto assets

With regards to property insurance, however, Opyn represents the beginning of a blockchain-style solution similar to those found in traditional financial markets. Compound is the third largest DeFi app on Ethereum, according to the results provided by DeFi Pulse.

Users can earn interest on the funds they deposit in the protocol and they can also take out loans against their deposits.

Compound has remained stable since its launch in late 2018, but everyone agrees that this sector of DeFi is still underdeveloped and has not really been tested in extreme situations.

If larger investors really decide to use Compound, they will demand a concrete way to protect themselves in situations of high risk of loss, and Opyn is exposing itself to respond to this request.

A system based on "put options"

Opyn's first product will offer coverage, which in financial jargon is called a "put option", which will guarantee users to recover most of the lost capital in the event of a disaster. Opyn does not offer insurance in the traditional sense.

No credit check or proof that the person owns the insured property will be required. Opyn will not even ask users to submit Know-your-customer (KYC) forms.

The system used is a double entry market in which tokenized ERC20 put options, called oTokens, are engaged. The Ethereum-based Convexity protocol can perform all sorts of options, said Koticha, one of the three co-founders behind the new product.

At the moment, it is simply running put options to protect Compound users. One of the collateral benefits of this insurance is that ETH holders will receive significant rewards related to their ETH staking.