All platforms boast about being $X00m insured. What does it mean in everyday life? Well, nothing is really clear. Let’s talk about maybe the most important thing in this space: the insurances.
As in real life insurances, it’s only when you need to use them that you discover that you are not fully protected. For CeFi (centralized finance) platforms like BlockFi, Nexo, Celsius etc. it is not clear how their insurances cover your funds if they are hacked or if they fold. It’s not clear how the insurances cover their international clients (there is a clear tropism toward only US clients). Also, with actually billions of assets under management on these platforms, their insurances might prove to be insufficient!
Internal business risks
Usually, insurances claim to cover for hacking risks and insider theft or dishonest acts. Also, most often, insurances do not cover for the most obvious risk: the company imploding due to internal business risks and going bankrupt. The trustworthiness of the people at the top is probably the most important thing, as you will never really know what do they really do to offer such high interest rates. This is exactly the story of Cred. Cred would convert depositors’ cryptocurrency to yuan. These yuans were lent to “moKredit” who would use them to finance its own micro-lending activities: microloans to Chinese borrowers, with it seems, interest rates of over 40%.
Another risk for CeFi: if bitcoin crashes to 5k how long can they support themselves before they go under? If they only have crypto collaterals, which plummet in value, everyone will cry. I assume the insurances won’t really cover that risk.
It might also be interesting to try yourself to insure your deposits. That’s exactly what Nexus Mutual (token NXM) of insurance.io (token INSUR) are proposing. As the names suggest, they are mutuals where members share the risk with each other. They usually charge 2-3% APY and cover something along these lines:
- The platform where you have some deposit got hacked, and you lost a certain % of your funds
- Or the withdrawal from the platform is halted for a certain period of time.
I personally believe it’s not worth it to take such insurances for your deposits on “low”-yield generating platforms like BlockFi or Nexo. It does not make any sense to pay 2-3% APY in addition, you would be better off to just hold your coins in your cold wallets. It would be much safer, and easier to sleep at night! However, as you can see in this blog, I am also experimenting with some high-yield platforms, which offers like 42% APY, and I will actually soon start to insure my deposit on these platforms, once I will go full retard on them!
Also. have a look at my different advices on how to stay safe in DeFi.
In case you liked my take on the insurances, or learned interesting things, or want to support me, please feel free to send me a coffee over.