From the inception of cryptocurrency in 2009, several cyber security attacks, and rug pulls have been reported, some of which have destabilized investors leading to huge loss of digital assets and in some cases deaths.

Blockchain technology, though offers security, accessibility, and transparency is still in its developing stages, thus, it is fragile and vulnerable to the nefarious activities of online hackers and scammers.

The protection of investors’ digital assets — cryptocurrencies, tokens, and NFTs — in the event of loss or theft through the dastardly acts of these criminal elements and blockchain failure is the primary focus of Crypto Insurance.

This policy provides some form of succor to crypto exchanges and investors who may be vulnerable to system failure, cyber security breaches, hacks, and device theft.

What is Crypto Insurance?

Crypto Insurance is a policy designed to protect investors against any loss associated with scams, device theft, service provider shutdowns, and cyber attacks—hacking, malware, phishing, ransomware, trojan software, and brute-force attacks.

The crypto space is prone to numerous attacks, and as such, the policy further provides some form of security and succor to mostly crypto exchanges and some investors desiring to safeguard their digital assets from unforeseen circumstances.

However, the insurance policy generally does not cover losses from price fluctuations, blockchain failure, or direct hardware loss or damage, nor cover the transfer of cryptocurrency to a third party or losses associated with unauthorized access to your non-custodial wallets due to a loss of your private keys, or loss as a result of investing in a Ponzi scheme.

Insuring crypto assets secures the interest of crypto projects, investors, traders, and enthusiasts, helping strengthen the fragile world of cryptocurrency and blockchain technology.

Far-reaching innovations can be adopted to help tackle the wanton cryptocurrency wallet hacks and thefts that have plagued cryptocurrency and its adjoining technology for a decade.

Overview of Crypto Attacks

The promising nature of cryptocurrency and blockchain technology and its potential to transform an individual’s and nation’s financial status are among the reasons for its wide acceptability and usage. In the process, it has drawn the attention of online criminals, scammers, and hackers.

These criminals labor day and night to break into crypto wallets — custodial and non-custodial — to defraud their victims and empty their accounts/savings.

Hot (online) wallets are more often more susceptible to these attacks than cold (offline) wallets, which is the primary reason most crypto exchanges rely on storing a large chunk of their digital assets in cold wallets.

Right from the launch of the first cryptocurrency, Bitcoin, in 2009, the crypto world has been inundated with reports of scams, hacks, theft, blockchain failures, and project rug pull—a malicious strategy in the crypto world in which project developers abandon a project and run away with millions of investors’ funds.

Statistics show that the number of malicious attacks recorded in the crypto space between 2009 and 2022 was higher than those experienced in other financial sectors combined during this period.

According to CNBC, according to the report, “Crypto scammers took a record $14 billion in 2021,” a record 516% increase from 2020. Of this total, 72% of stolen funds were taken from DeFi protocols, a burgeoning area in the crypto industry.

In a similar report released by the US Federal Trade Commission (FTC), Nover $1 billion worth of cryptocurrency was lost to scams in just 14 months, from January 1, 2021, to March 31, 2022, and over 46,000 people were affected. The report noted that this is a record higher than other payment methods.

Millions of dollars worth of crypto assets have been lost over these years, and investors have had one horrible experience or the other to recount. Numerous scams, hacks, thefts, and rug pulls have been reported, dampening the morale of new and existing investors and the wide acceptance of digital currency worldwide.

Criminals exploit the anonymity of blockchain technology and look out for bugs in smart contracts and other loopholes.

Cryptocurrency Hacks

Centralized Exchanges

Seven days before Bithumb was hacked, the Korean exchange Coinrail was also infiltrated by hackers, resulting in the theft of approximately $37.2 million worth of digital assets.

On June 19, 2018, Bithumb suffered a cyberattack. Before the incident, Bithumb was the sixth-largest cryptocurrency exchange in the world and the leading one in South Korea. According to reports from CoinTelegraph, the attack caused Bithumb a loss of about $30 million.

In January 2018, another major Asian cryptocurrency exchange, Coincheck, was hacked, resulting in the loss of 523 million NEM tokens, worth about $534 million.

In 2020, hackers attacked the Singapore-based cryptocurrency exchange KuCoin, stealing assets worth over $200 million.

DeFi (Decentralized Finance)

Cream Finance also faced two cyberattacks, leading to the theft of approximately $150 million worth of Bitcoin and stablecoins, significantly impacting the exchange’s development.

In an October 2021 cyberattack, an 18-year-old hacked the Indexed Finance exchange and stole up to $16 million worth of assets. This incident highlighted that hackers and scammers are not restricted by age or gender.

CNBC states, “In 2021, cryptocurrency scammers stole a record $14 billion worth of on-chain assets.”

One of the largest cyberattacks orchestrated by hackers was the “Poly Network hack,” which led to the theft of over $611 million from wallets on Ethereum, Binance Smart Chain, and Polygon. Reports indicated that the hacker eventually returned the stolen funds.

On January 20, 2022, Crypto.com, a US-based cryptocurrency exchange, reported that hackers had compromised over 400 user accounts and made unauthorized withdrawals from them.

Following the Poly Network hack, another major incident was the Ronin hack. Ronin Network is a key platform supporting the popular P2E (Play-to-Earn) game Axie Infinity. On March 23, 2022, hackers stole cryptocurrency worth $540 million from the Ronin Network.

The crypto world is filled with weekly reports of cybersecurity breaches, scams, thefts, smart contract vulnerabilities, and crypto wallet fraud due to private key leaks, leading to significant losses of digital assets.

However, cryptocurrency insurance can protect crypto companies or investors against unexpected events during operations or transactions, helping to minimize losses from such incidents.

Most cyberattacks occur on hot wallets, which are online storage mechanisms that are less secure than cold wallets (offline storage). Therefore, implementing strict security measures, storing crypto assets in cold wallets instead of hot wallets, and regularly auditing wallets and smart contracts can reduce the occurrence of cybercrimes.

The Importance of Crypto Insurance

Cryptocurrency as a digital currency is highly valuable, hence the need to safeguard both those keeping these assets—Centralized Exchanges (CExs) and Decentralized Exchanges (DExs)—and those who have invested their hard-earned resources or carry out some form of trading activity—whale and retail investors.

One of the many ways to protect this industry is through Crypto Insurance. But why should a crypto exchange or investor opt for insurance?

1. Crypto Insurance helps protect a portion of the digital assets held by various custodial wallets or exchanges against cyber security attacks.
2. Insuring crypto assets with private industries or in exchanges helps mitigate losses and saves the individual or project from possible collapse.
3. Also, Crypto Insurance provides a soft landing for crypto projects and investors who may be victims of hacks and other vicious attacks.
4. Moreover, crypto insurance in the crypto world helps instill trust within weary investors and assures the legitimacy that the industry truly needs. Thus, attracting potential investors.
5. Furthermore, knowing that your digital assets are well insured greatly boosts customer confidence and attracts huge returns to the industry as seen with traditional financial institutions.
6. In addition, adopting crypto insurance would reduce the myriads of heartbreaks and avoidable deaths experienced over the years as a result of huge cryptocurrency losses.

Renowned Cryptocurrency Insurance Companies

Many well-known traditional insurance companies remain skeptical about entering the rapidly popularizing field of cryptocurrency. This hesitation is due to the lack of regulation, high volatility, and significant speculation and uncertainty associated with the cryptocurrency space.

Despite the challenges faced by the cryptocurrency industry, several cryptocurrency insurance companies and exchanges that offer insurance services have emerged as leaders in the field. The following is a list, in no particular order:

Kase
A leading cryptocurrency insurance company headquartered in Canada, Kase offers services that “comprehensively prevent incidents of hacking and fraud leading to the loss of digital currencies.”
Kase’s services are only available to Canadian citizens and residents.

CoinCover
A cryptocurrency protection platform that provides insurance services, CoinCover offers security and recovery solutions for cryptocurrency investments, technologies, and companies. The company provides targeted insurance services for crypto wallets like BitGo, Vesto, and Civic. Coverage includes losses or theft of funds caused by device theft, cyberattacks, and hacking incidents. The insured amount depends on the specific protection plan.
In addition, CoinCover safeguards crypto assets in case of technical or system failures, offering security to both cryptocurrency exchanges and investors.

EmBrokers
Specializes in providing insurance services for the challenging-to-insure sector of cryptocurrency and blockchain projects.

Coinbase
A leading U.S. cryptocurrency exchange, Coinbase holds a $255 million crime insurance policy to provide coverage in the event of a significant cybersecurity incident on the platform.
However, this insurance does not cover losses due to hacked accounts, as the security of non-custodial crypto wallets is the user’s responsibility. Therefore, using insured wallets is highly recommended.

Bitstamp
Provides insurance for investors’ and traders’ digital assets through BitGo and Copper wallets. Two-thirds of these assets are stored in offline cold wallets. Bitstamp offers over $300 million in crime insurance.

DeFi Insurance

The operational model of DeFi insurance is fundamentally different from traditional insurance. It does not rely on centralized institutions but instead uses decentralized liquidity pools to provide risk protection for users. Participants can pay premiums to ensure the safety of their capital, while insurance providers earn interest from these premiums. This interest is generated from the yields of locked funds, thus creating a link between premiums and protocol risks.

Insurance providers allocate their funds to higher-yield pools to gain returns exceeding protocol risks. This means that individual users trade the outcomes of events based on their assessment of the likelihood of potential risks. Suppose a negative event occurs with the protocol covered by insurance, such as a hacking incident. In that case, the funds from the relevant liquidity pool will compensate the users who purchased insurance for that specific event.

One significant advantage of decentralized insurance systems is that anyone can participate, and the transparency of on-chain operations is enhanced. As the DeFi ecosystem expands, users’ demand for solutions to protect their funds has become increasingly urgent. Strategies that concentrate resources and diversify risks are particularly effective when addressing abnormal events that could have major financial impacts. A shared liquidity pool can cover larger risks with less capital, providing a collective solution for addressing large-scale issues.

DeFi insurance is favored for its automation and transparency. Smart contracts, based on preset parameters and real-time data, can enable automatic claims processing. This improves the efficiency of claims and reduces the potential for human bias or errors. With the growth of the DeFi market, the demand for solutions that protect user funds is continuously increasing, making decentralized insurance an important and promising field.

Categories of DeFi Insurance

DeFi insurance mainly covers the following categories:

1. Protocol Cover: This type of insurance protects users from potential financial losses using DeFi protocols, such as risks associated with smart contract vulnerabilities, oracle failures, flaws in economic design, and governance attacks.
2. Custody Cover: This insurance protects users against financial losses when storing digital assets in third-party custodial accounts, such as centralized exchanges.
3. Depeg Cover: This form of insurance is designed to protect users from the risk of assets losing their peg to a target currency, especially for stablecoins and other pegged assets like stETH.
4. Yield Token Cover: This insurance seeks to protect users from risks that may arise when participating in yield token-related activities, ensuring the safety of their investments.

Nexus Mutual

Nexus Mutual is an insurance platform based on the Ethereum network. Its first product is Smart Contract Cover, which provides protection in case of vulnerabilities in smart contracts used across various decentralized finance (DeFi) platforms. Nexus Mutual operates as a decentralized autonomous organization (DAO), where the control is entirely in the hands of its members. The Nexus Mutual network manages membership status, reward distribution, and governance voting rights for NXM token holders.

Athena Ins

Athena Ins is a new decentralized insurance protocol that allows users to purchase insurance for their funds, helping them avoid risks such as hacking attacks and stablecoin depegging when participating in DeFi activities. According to the official introduction, it has the following features:

• Affordable Insurance Premiums: Premiums are calculated through an algorithm to ensure users can afford them.
• Compensation for Losses: In the event of asset loss, users can receive compensation.
• Investment Flexibility: Users can choose their preferred insurance coverage amounts and durations.
• Sustainable Returns: Premiums paid by users can be utilized to generate interest.

ATEN

ATEN is the native token of Athena Ins. Beyond maintaining the operation of Athena Ins, ATEN holders can also participate in the protocol’s governance. Through democratic voting, they can influence the future development of Athena Ins. The tokenomics of ATEN include:

• A total supply of 3 billion ATEN tokens.
• A deflationary mechanism is in place, where a portion of the deductible collected during claims is used to buy back ATEN tokens, which are then burned to maintain supply limitations.
• ATEN holders can also participate in staking to earn additional tokens.

Decentralized insurance protocols represent a new sector, and understanding the general framework of such services offers a glimpse into their potential. Hopefully, more projects will soon emerge and develop, providing a safer and more secure DeFi environment for everyone.

Conclusion

Crypto insurance is still a new frontier but promises to safeguard crypto exchanges and investors against crypto losses due to cyber security breaches and system failure.

So many traditional insurance companies are indicating a growing interest in the gradual adoption of blockchain technology to process operations, handle claims, and encourage payment and acceptance of cryptocurrencies.

However, the challenge of volatility, uncertainty, and little or no regulation of the crypto industry are of great concern to these companies. Still, the increasing adoption of digital currency and the underlying technology by millions calls for a form of insurance cover.