Author: Thejaswini M A
Compiled by: Luffy, Foresight News
"Insurance is purely a scam," this is almost the consensus among everyone in the market.
There is some truth to this sentiment. Cigna developed an algorithm that denies claims without even reviewing medical records. UnitedHealth stopped covering care costs once an algorithm-determined time limit expired, completely ignoring the attending physician's treatment opinions. The traditional insurance business model has always been: collect customer funds first, take a hefty cut, and then set up layers of barriers to obstruct claims.
Today, bank deposits are protected by the Federal Deposit Insurance Corporation (FDIC), but the coverage limit is only $250,000, a standard that has barely been adjusted since its establishment in 1934. Brokerage accounts are protected by the Securities Investor Protection Corporation (SIPC) with a $500,000 limit; once account assets exceed this amount, the protection becomes virtually meaningless. The perceived level of protection in the public mind falls far short of reality, with payout limits unilaterally set by insurance companies.
DeFi insurance was supposed to solve this pain point completely: eliminate intermediaries, and as long as smart contract preset conditions are triggered, payouts execute automatically, thoroughly removing the space for malicious human claim denial.
But the reality is that almost no one buys it. Insurance premiums significantly erode investment returns; after deducting premiums, the remaining returns simply cannot match the investment risks users bear.
This article will explain this market reality and the core reasons why it is difficult to reverse the predicament, even though everyone wants to solve this problem.
Nexus Mutual is currently the largest DeFi insurance service provider. Since its launch in 2019, its cumulative total claims paid amount to just over $18 million.
Data source: Dune Analytics
In April 2026, Kelp DAO suffered a hacker attack, losing as much as $292 million. This single theft amount is equivalent to 16 times the total claims paid by this leading insurance institution over seven years.
This forms an extreme contrast with the rampant claim denial in traditional insurance. Traditional insurance charges high premiums but does everything possible to obstruct claims; while DeFi insurance has meager premium income, rooted in the fact that almost no investors are willing to buy coverage.
The stable operation of traditional insurance hinges on risks being uncorrelated. One house catching fire does not cause damage to other residents' homes. An insurance company can sell policies to 1 million users, and a single fire claim can be fully covered by the total premiums collected. But DeFi lacks this risk isolation mechanism: security incidents like oracle failures or cross-chain bridge vulnerabilities can trigger a chain reaction impacting all liquidity pools and lending protocols built on that underlying asset. During the USDC depeg event in March 2023, all protocols using USDC as collateral were affected that day. For a DeFi insurance pool, risks are highly correlated; the underwriter can only bet that the losses from a security incident are controllable and that the insurance pool funds are sufficient to cover them.
In March 2023, Euler Finance was hacked for $197 million, and the chain risk quickly spread: Angle Protocol lost $17 million due to holding Euler liquidity tokens, Yield Protocol urgently shut down its business, and several other platforms like Inverse Finance were also affected.
Once a protocol has a security vulnerability, it often impacts multiple projects; a single day of extreme incidents can even directly drain the entire payout reserve of an insurance pool.
I compiled the current premium rates for Nexus Mutual and InsurAce, comparing them against the native annualized yields of the protocols they cover: Aave V3's USDC deposit annualized yield is about 3.14%, with an insurance premium range of 1.5%–2.5%. After deducting the premium, the net yield is only 0.6%–1.6%. Investors taking on on-chain security risks end up with returns only slightly higher than a regular bank savings account.
Morpho, Compound, and Spark have similar situations, with native annualized yields of 3.5%–4%. Premiums eat up one-third to half of the returns; although there is still a meager profit, the cost-effectiveness is extremely low.
Maple Finance's institutional lending pools offer annualized yields of 4.77%–4.90%, but insurance rates are as high as 3%–6%, resulting in a net yield range of -1.1% to 1.9% after purchasing insurance. Ethena staking yields 3.6%–4% annually, with premiums also at 3%–6%, leading to a net yield of -2.4% to 1%. On these two types of platforms, purchasing insurance could even lead to a loss of principal in extreme cases.
Only the former MakerDAO (Sky) stands out. Its savings product offers a 3.6% annualized yield, with the lowest premium rate at just 0.11%. The market generally considers it the lowest-risk target within DeFi, and after purchasing insurance, the net yield remains at 2.8%–3.5%, preserving the vast majority of returns.
Premium pricing strictly corresponds to risk levels, but excessively high premiums on emerging platforms directly consume the high yields users seek by entering the market.
Crypto investors choose to forgo insurance not out of laziness or recklessness; they know that in most cases, buying insurance equates to zeroing out their returns. Even if all DeFi depositors unanimously chose full coverage tomorrow, the entire industry would be unable to meet the demand: Nexus Mutual's total capital pool is about $81.56 million, and the industry's total effective underwriting capacity is at most a few hundred million dollars, while the total value locked across major protocols is in the hundreds of billions—a vast gap between supply and demand.
If a major security incident on the scale of Kelp DAO occurs, a single claim would directly drain most of the industry's insurance reserves.
The $18 million historical total claims paid precisely exposes the fragility of the industry's capital pools; the entire market has never experienced a mega-risk event capable of breaking through underwriting reserves.
When a user submits a claim to Nexus Mutual, all platform token-holding members vote to decide whether to pay out. Members who vote in favor of a claim will see their own assets directly impaired if the claim payout ultimately fails. This mechanism inherently fosters a tendency to deny claims. Traditional insurance specifically establishes underwriters and claims adjusters to balance conflicts, whereas DeFi insurance design merges all rights and responsibilities into the same group.
Before the 2008 financial crisis, financial risk pricing institutions generally believed a nationwide housing market crash in the U.S. was impossible, as they had never experienced one. Insurance giant AIG sold risk protection contracts on a massive scale, but when the market crisis truly erupted, it was completely unable to honor them.
Before the U.S. government introduced FDIC bank deposit insurance, ordinary depositors had no asset safety net. The Great Depression forced the government to mandate bank insurance, making coverage a hard cost of banking operations.
In the DeFi space, no one can force protocols like Aave or Morpho to buy insurance. Smart contract deployment is completely permissionless, and no entity exists that can mandate projects to configure risk protection, which also results in the industry lacking a backstop mechanism to withstand extreme market conditions.
Nexus Mutual's three largest historical claims are: approximately $7.3 million paid in two batches for the FTX collapse, $5 million paid for the TribeDAO hack, and $3.4 million paid for the Euler Finance hack. These three amounts combined almost equal the platform's total claims of $18.6 million over seven years.
Today, this mutual insurance platform is shifting towards proactive risk prevention, partnering with security audit firms like Immunefi, Cantina, and Sherlock to launch bug bounty protection products. Protocol parties only need to bear 20% of critical vulnerability bounties, with the remaining funds covered by Nexus Mutual, incentivizing white hat hackers upfront to find vulnerabilities and preventing hacking incidents at the source. Meanwhile, Nexus Mutual is laying out compliant insurance tranching, attempting to connect crypto risks to reinsurance capital pools and introduce larger volumes of external capital to supplement underwriting capacity.
Cantina went a step further in March 2025, launching an independent native protocol protection product, allowing users to receive claims even if a vulnerability was not discovered by bounty hunters beforehand and the protocol suffers a hacker attack.
Both of these transformation moves essentially acknowledge a core reality: on-chain native funds are insufficient to cover on-chain risks. The insurance pool is too small, risks are highly correlated, and the claim adjudicators are the same group as the capital providers—three fundamental flaws that cannot be eradicated.
Nexus Mutual's total value locked, as tracked by DeFiLlama, stands at $81.56 million, accounting for 85% of the entire DeFi insurance sector's market share. The scale of other peers continues to shrink: InsurAce's peak TVL was $150 million, now only $132,000 remains, completing only one major claim after the UST depeg in 2022; Sherlock's capital pool shrank from $60 million to $505,000 within a year; millions of dollars in Unslashed Finance are trapped in outdated code that stopped being updated at the end of 2024. Other insurance projects have either completely shut down or changed their business track.
A lighthouse warns all ships of reefs but cannot charge passing vessels a usage fee, so few people are willing to voluntarily fund its construction. The benefits are shared by all, but the cost is borne solely by the builder.
The value of DeFi insurance is precisely to prevent the spread of chain liquidation cascading crises. Crypto market assets are highly interconnected; only when everyone is simultaneously insured can overall market stability be maintained. But if everyone hopes others will insure as a backstop while unwilling to bear the premium cost themselves, ultimately no one will configure insurance, and the risk protection system will exist in name only. A safeguard that no one actively supports ultimately cannot protect any assets.
