By Kyle, Investment Manager@Bing Ventures

Led by liquidity mining, DeFi became the focus of the industry in the second half of 2020. Users deposit their assets into the contract to provide liquidity for the agreement, which in turn rewards them with fee sharing and governance tokens. DeFi is a target of attack because of the assets that are stored in the protocol, and hackers can attack the contract in a variety of ways.

According to incomplete statistics of SlowMist Hacked, the number of blockchain security incidents in 2021 far exceeded that of previous years in terms of number, risk, amount of money involved, and scale of impact, among which a rare “white hat hacker” incident occurred.

Source: DefiLlama

With the development of the crypto market and DeFi scale, the DeFi insurance market, which is just needed by the industry, will also continue to climb. It is expected that several leading insurance projects will be born in the future. In terms of total locked up funds in the DeFi derivatives segment, Nexus Mutual and Armor are leading the insurance race for now.

Armor is actually a DeFi asset insurance aggregator project built on Nexus Mutual. Armor is insured by Nexus, and the user can pledge NXM for the underwriting services they need. Nexus, a much needed insurance provider in the digital asset ecosystem, has been optimised for the value and duration of DeFi asset deployments.

Customised dynamic risk management

Armor is a project initiated by Cover team’s core developer after he left Cover. Armor is positioned as a distribution agent for NXM, and instead of doing insurance business, Armor buys INSURANCE for NXM. Covered by Nexus, Armor evolves digital asset insurance from static coverage to dynamic risk management tailored to customer needs. Armor optimised the NXM model with the following:

1.NXM requires KYC, but Armor does not.

2.NXM policies are tokenised in the form of NFT (ERC721) to provide customers with more flexible pay-as-you-go and pay-as-demand insurance services.

3.Armor.Fi will also hold the NXM and can pledge the NXM to start the underwriting service of the different DeFi products required by the customer if they come online.

Source: Armor

The Armor protocol has five main products: arNXM, arNFT, arCORE and arSHIELD, and ArmorDAO

• ArNXM:

Nexus Mutual created WrappedNXM (wNXM), which allows investors to invest in NXM without KYC. However, as more WNXMs are created, the number of NXMs available for internal interactive functions such as pledging, claim evaluation, and governance voting decreases.

Armor created arNXM to address this issue by allowing investors to participate in Nexus Mutual operations without KYC. To get arNXM, the user can pledge wNXM in Armor. Armor opened wNXM and pledged the NXM token to Nexus Mutual. By pledging on Nexus Mutual, the pledgee sends a signal that smart contracts are safe, opening up more channels for insurance sales.

• ArNFT:

ArNFT is a tokenised form of insurance purchased on Nexus Mutual. ArNFT allows users to purchase insurance without KYC. Because these insured objects are tokenized, users can now transfer them to other users or sell them on the secondary market. These tokenized insurances will further explore DeFi composability. ArNFT is available with all Nexus Mutual insurance.

• ArCORE:

ArCORE is a pay-as-you-go insurance product. Armor tracks the exact amount of user funds through a mobile payment system because they can dynamically cross different protocols. ArCORE’s underlying technology integrates arNFT, which is sold at a premium after being broken down. ArCORE allows for more innovative product design and demonstrates the composability of the DeFi ecosystem.

• ArSHIELD:

ArSHIELD is an insurance repository for liquid market maker (LP) tokens, where the insurance premium is automatically deducted from the LP fees earned. ArSHIELD essentially creates LP tokens with insurance, with no upfront payment required. ArSHIELD only covers the agreed risk of liquidity pools. Shield + Vault is the most secure version and guarantees payouts. It is fully collateralized but has limited underwriting capacity. It has a high multiplier of 200%, making it twice as expensive as the Shield Vault.

Shield Vault is a riskier version, and the claim payout may not be fully reimbursed because it depends on the funds available in the pool at the time of the hack. To compensate for the extra risk, it only has a 100% premium multiplier, meaning it costs the same as buying directly from Nexus Mutual itself. The insurance capacity is designed to be unlimited, so it is difficult for users not to be satisfied with the mortgage rate, which may not be fully mortgaged.

• ArmorDAO:

ArmorDAO is sufficiently decentralized at launch while maintaining organizational agility. The proxies are controlled with a new hybrid system. There is a timelock owned contract which controls everything with two owners: a team multisig and a full DAO.

A trusted insurance process

Most of the problems with centralized insurers in the past were not because of technological limitations, but because there was no comprehensive solution. For the DeFi insurance program to explode, the problem of multi-party data trust must be solved. Entire professions and departments in traditional insurance programs devote a lot of time to claims investigation. In fact, the whole concept of insurance conflicts with the spirit of smart contracts — insurance is indeterminate and smart contracts are written to death.

Armor selects a third-party trusted neutral data source to determine whether a claim should be paid. After a claim is filed, an audit process is triggered and submitted to Nexus Mutual for review. Armor token holders will also participate in Nexus Mutual’s claim approval and payment process. If a payment is confirmed, the amount is sent to Armor’s payment funds repository and then distributed to the affected users.

Source: Armor

On the surface, blockchain smart contracts look a lot like traditional insurance contracts and blockchain has no indirect claim adjustment costs, everything happens automatically. Credit risk is also lower because tokens are locked up as collateral. Real insurance claims always require some form of human intervention. Conversely, if the vault holds “sufficient reserve assets” or even “interest-bearing assets”, users are more confident that they have enough money to pay future claims.

Armor only represents both the supply and demand side of insurance, which allows them to direct supply to lower insurance costs and sell more insurance by capturing the huge untapped market with arCore and arShield. Armor presents a different paradigm opportunity for insurance programs that can cut expense costs and increase trust that legitimate claims will be paid. This, in turn, will encourage DeFi insurance programs that address these issues to compete with traditional insurance programs.

Professional insurance brokerage ability

In essence, insurance is a vehicle for pooling capital and socialising large losses so that participants do not go bankrupt in a catastrophic event. Insurance socializes the cost of experiencing catastrophic events, thus enabling individuals to take risks.

It is a risk management tool that encourages more user participation and is critical for the DeFi industry to go beyond the existing niche audience. The DeFi industry needs insurance products to convince institutional participants with large amounts of capital to join.

Source: Dune Analytic

In the DeFi ecosystem, insurance remains a niche market. However, as the insurance sector matures and institutional players come on board, insurance could become one of DeFi’s biggest pillars.

We see Armor as a highly synergistic product in the insurance space, especially with Nexus Mutual, because of their different strengths. Nexus Mutual is the main underwriter. Their large pools of capital and lever-based coverage model insulate risk well in this respect.

Armor maximises this capital pool by increasing its accessibility to capture fees. Over time, I think “Mutual Insurance Assets” will hopefully change DeFi coverage as we know it for Armor, a business-as-revenue DeFi project. Armor is in a better position to capture value in the long term as insurance is the largest segment in DeFi as it is in traditional finance.

Traditional insurance is a $10 trillion industry, accounting for 30 percent of the world’s largest financial services companies. We are expected to witness the birth of a stronger professional insurance broking service agreement in the crypto space.