If you are reading this Legal Update, chances are that you have already heard of Decentralized Finance (DeFi). Put simply, DeFi is a decentralized platform that enables peer-to-peer provision of various types of financial services without the need for a central intermediary (such as a bank). DeFi transactions are enabled by public blockchains, such as Ethereum, Solana, Terra and Avalanche.
The volume of transactions that take place in the DeFi space is massive and is continuing to grow exponentially, as measured by the overall value of cryptocurrency assets deposited in DeFi protocols (i.e., “total value locked” or “TVL”). Given the growth experienced by the DeFi market, it is not surprising that DeFi users have sought to take advantage of risk allocation devices similar to those used in other markets and industries. One such risk allocation device is insurance. Given the fact that DeFi is—by its nature—decentralized and its users are accustomed to decentralized financial products, it makes sense that insurance solutions provided to DeFi users would likewise have decentralized characteristics. Indeed, we have seen a number of providers established recently in the emerging decentralized insurance space for the purpose of offering decentralized insurance solutions. However, insurance coverage of events that affect the DeFi ecosystem (e.g., cybersecurity coverage for DeFi exchanges) need not be decentralized—which provides ample opportunity for existing providers of such insurance coverage to expand their current offerings into the DeFi market.