Network Staking Could Potentially Revolutionize DeFi Insurance By

Smart contracts have enabled widespread innovation with blockchain technology, but flaws in their codes have led to hacks that saw millions of dollars stolen from users. It has become an unprecedented situation where market participants are underestimating the risk of protocols they’re invested in.

To overcome these unknown vulnerabilities, we need a sophisticated asset protection technique with no limitations to a specific project or event. We need a solution that can insure users without charging high premiums. Network staking can be a promising way to eliminate bottlenecks in the system and settle claims in a decentralized manner.

What is Network Staking?

Network staking is an evolution in DeFi cover liquidity. In this system, contributors stake the entire network, not a specific project. This allows contributors to hedge the risk of loss while participating as a cover provider. Since the stakeholder assets have been diversified, losses related to any particular project have little effect on their position. This low correlation of risk leads to improved capital efficiency, which drives staking rewards over time. The amount of diversification makes it possible to cover multiple chains, projects and loss types under a single cover offering.

The benefits of network staking are unmatched for both stakeholders and users seeking cover. This low risk, high rewards staking model provides the widest and most fair cover. Not only does this improve the cover offerings, the diversified model provides underlying protection for cover providers. In this system, it is possible to afford users the same benefits found in traditional insurance offerings, only democratized through the use of DAO.

But the question is, why do we need a new insurance model for DeFi?

Existing Problems in DeFi Insurance

Currently, DeFi insurance protocols are variations of the same risk model, “project pools”. Some have improved the tokenomics or elected to offer pools for different cover types, but the cover mechanism remains the same. In these models, it requires contributors to stake specific projects in order to offer cover. The concept is simple. In the event of a loss to the project users, stakeholders are liquidated to the amount of the loss. Which in extreme cases, could be a total loss of your staked assets.

Due to this high correlation of risk, project pools are capital inefficient as they require fully collateralized cover positions. The cover is limited to the amount staked into the pool, severely restricting the availability of cover and the amount of rewards that can be earned. Furthermore, if a pool has not been created for a particular project, no cover exists, leaving the users completely unprotected.

The cover in these pools are strictly limited to the project and the type of loss selected. E.g. smart contract failure or exploit. This limited cover requires users to purchase multiple…