Crypto Sector Recovery At Risk As Insurance Options Remain Limited Post-FTX Crash

Key Points:

• Lack of insurance options for crypto investors highlighted by FTX exchange collapse.
• DeFi insurance protocols account for only $300 million out of $80 billion invested in DeFi services.
• Nexus Mutual, the largest DeFi insurance provider, accounts for around 70% of funds locked in crypto-native insurance protocols and has paid out roughly $5 million in claims.

The recent collapse of Sam Bankman-Fried’s FTX exchange has highlighted crypto investors’ lack of insurance options. While stock brokerage accounts offer some coverage against events like bankruptcy, digital asset platforms offer few, if any, shields, as per BNN Bloomberg.

This has made it challenging for investors to protect their positions and protocols, which is crucial for the industry to recover from unprecedented bankruptcies and hacks.

Data from DeFiLlama shows that the $1.1 trillion digital asset sector’s DeFi insurance protocols amount to about $300 million, while over $80 billion is invested in DeFi services overall. Traditional insurers remain cautious about offering crypto-insurance, and crypto-native solutions in decentralized finance (DeFi) account for a fraction of the sector.

Nexus Mutual, the largest DeFi insurance provider, accounts for around 70% of funds locked in crypto-native insurance protocols. The company has paid out roughly $5 million in claims from the bankruptcies of FTX and crypto lender BlockFi, with another $2 million expected. However, these figures are insignificant compared to the billions lost due to the FTX collapse.

Hugh Karp, founder of Nexus Mutual, believes that DeFi insurance will play a bigger role as the digital asset industry matures. However, Riyad Carey, a research analyst at crypto data provider Kaiko, thinks that there is a lot of unmet demand for insurance options, which new entrants, including legacy insurers could capture.

While investors seek ways to insure their positions and protocols, Bitcoin and Ether reserves at centralized crypto exchanges have plummeted since the FTX collapse. This trend suggests that many investors prefer offline custody of their tokens rather than keeping them on digital asset platforms.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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