Decentralized finance is a realm of staggering growth, ballooning into a market worth hundreds of billions. However, for investors, every gain is shadowed by the constant threat of a crippling hack or protocol collapse. A new insurance market is emerging to confront this danger, with community-run crypto projects and established insurance giants offering competing visions.
Source: CoinLaw
As these two forces meet, they’re building the tools to manage digital asset risk, but it’s an open question if their safety net can secure DeFi’s future and finally entice hesitant institutional money off the sidelines.
Billions of dollars in crypto vanish into the ether from exploits each year. This reality makes insurance less of a perk and more of a fundamental requirement for the market to be taken seriously. The response has split along two distinct paths.
Crypto-natives vs. corporate giants
The split creates two camps. One is populated by protocols that grew out of the crypto world, built on ideals of shared ownership and open ledgers. The other features the old guard of the insurance industry, bringing massive financial backing and decades of experience to a new and volatile asset class.
| Feature | Decentralized Insurance (e.g., Nexus Mutual) | Traditional & Centralized Insurance (e.g., Evertas) |
|---|---|---|
| Underlying Model | Members pool capital to share risk with each other. | A licensed company uses its own balance sheet for policies. |
| Coverage Focus | Code exploits, stablecoin failures, on-chain events. | Custody theft, corporate crime, off-chain operations. |
| Typical Clients | Individual DeFi users, DAOs, and protocols. | Big crypto funds, exchanges, institutional custodians. |
| Claim Process | Token holders vote on claims based on on-chain evidence. | Standard investigation with adjusters and legal teams. |
| Transparency | Publicly viewable capital pools and claim history. | Financials and underwriting details are kept private. |
Nexus Mutual is the heavyweight in the decentralized corner, controlling a capital pool of roughly $203.87 million. It has already paid out over $18.2 million to cover losses from more than 200 incidents, including the high-profile implosions of FTX and BlockFi. Its model is unique – Members stake the NXM token to underwrite specific risks and vote on claim validity, ensuring everyone has skin in the game.
InsurAce, with about $79.6 million locked, takes a different tack by offering portfolio-based coverage across multiple blockchains, which can lower insurance costs for users.
At the same time, traditional finance has arrived in force. Evertas, with the backing of the legendary Lloyd’s of London, can write policies for up to $420 million to cover assets in custody.
Mainstream insurers like Canopius and Chubb, working with brokers such as Aon, are already providing heavyweight coverage for institutions like Matrixport and Anchorage Digital Bank. Their participation signals a powerful move to bring legitimacy and security to the asset class.
When disaster strikes – Payouts and problems
An insurance policy is only as good as its willingness to pay. The crypto insurance world has been tested by real-world disasters, which have shown both its promise and its weak spots.
Source: Life Insurance international
Successful payouts have been a vital proof point. When Arcadia Finance was hacked in July 2025, Nexus Mutual quickly started paying back affected users, disbursing around $250,000. That came after it had already honored claims for the failures of centralized platforms like Hodlnaut and FTX, which helped build trust.
In another major test, InsurAce paid out $11.7 million to people burned by the TerraUSD (UST) stablecoin collapse, proving it could handle a massive, market-shaking event.
Alas, the story isn’t always that clean. The Euler Finance hack threw a wrench in the works. Nexus Mutual paid out $2 million in claims, only for the hacker to unexpectedly return all the stolen money. This left the mutual in the awkward position of having to claw back the insurance payouts, raising tricky questions about what happens when “stolen” assets suddenly reappear.
Painful claim denials also expose the industry’s growing pains. Some users have had claims rejected over technicalities in the fine print, like the difference between a covered smart contract exploit and an uncovered “frontend attack.” These disputes show just how vital it is for policies to be crystal clear and for users to understand exactly what they’re buying in this complex field.
Fundamental challenges – Capital, risk, and trust
For all its growth, the crypto insurance industry faces a few deep, fundamental problems that could threaten its future.
The first is a struggle for capital. DeFi insurance protocols need to attract money to underwrite policies, but they’re competing with DeFi lending platforms that often promise much higher yields. In the traditional world, regulators aren’t helping; the EU’s EIOPA has floated a rule requiring a punishing 100% capital reserve for any crypto held by insurers. Such a rule would lock up huge sums of money and choke off growth.
Second, it’s incredibly difficult to price risk for something completely new. Car insurance models are built on a century of accident data; DeFi insurers have to assess brand-new smart contracts that have never been battle-tested. This has pushed them toward novel solutions like using AI to scan for code flaws or developing parametric insurance.
Parametric policies use simple data triggers—like a stablecoin trading below its peg for 24 hours—to automatically pay out, skipping a long and complicated claims process.
Finally, the decentralized governance model can be a liability. In an insurance DAO, the token holders who vote on claims have a built-in conflict: denying a large claim protects the value of their own investment in the capital pool. While ideas like incentivized voting or using third-party arbitrators like Kleros try to keep things fair, the danger that large “whale” investors could sway a vote to protect their own wallets is very real.
Reinsurance and big money
To handle shocks to the system, a more mature financial layer is beginning to form – On-chain reinsurance, where insurers get their own insurance.
Firms like Relm are building regulated businesses to act as a bridge, bringing traditional reinsurance capital to the DeFi world. At the same time, crypto-first platforms like OnRe (formerly Nayms) and Uno Re are creating their own token-based reinsurance markets. These platforms let investors backstop insurance pools and earn returns that aren’t tied to the wild swings of the crypto market.
This growing sophistication, alongside better security practices like professional smart contract audits and public bug bounties, is laying the groundwork needed to attract large institutional players. For a major fund, being able to insure its digital assets isn’t just a bonus; it’s a core part of its duty to protect its clients’ money.
The crypto insurance market is at a crossroads. The blending of DeFi’s raw innovation with the financial power of the traditional world is creating a stronger, more durable market. Major obstacles around rules, capital, and governance are still in the way, but the rapid growth of this sector is the clearest signal yet that the digital asset economy is finally growing up.