tl;dr
- Hacks and threats in Web3 have grown alongside crypto adoption.
- $2.2 billion in crypto was stolen in 2024, a 21% increase from 2023.
- Traditional insurance models are too slow and centralized for Web3 risks.
- Web2 insurers hesitate due to the decentralized nature of Web3 assets.
- Web3 insurance uses decentralized risk-sharing pools instead of centralized firms.
A Brief Introduction to Web3, Risks, and Insurance
Hacks and exploits have been a part of the web3 world since its genesis. As cryptocurrencies grow in popularity and become part of the mainstream, so do hacks and threats.
According to Chainalysis, approximately $2.2 billion worth of crypto funds were stolen from hacks in 2024, a 21.07% increase compared to 2023. The number of individual hacking incidents also rose from 282 to 303 year-over-year. The largest breach of 2024, the DMM Bitcoin hack, saw over $308 million stolen from the Japanese exchange, allegedly due to a compromised private key.
Despite advancements in security, even established centralized platforms remain vulnerable, highlighting the persistent risks users face in the Web3 ecosystem.
In a space where smart contract exploits, exchange breaches, and wallet compromises are regular threats, users and investors are increasingly demanding new forms of protection. Traditional insurance models are often too slow, centralized, or ill-equipped to cover decentralized assets effectively.
In this article, we'll break down how web3 insurance works, why it matters, and how it could shape the future of risk management in the decentralized world of crypto.
Why Traditional Insurance Falls Short in the Web3 World
While the banking sector has warmed up slightly in regards to cryptocurrencies, the insurance industry has not. There are no large web2 insurance firms willing to underwrite an insurance contract for Web3 risks at the time of writing this.
This hesitation stems from the unique nature of digital assets, smart contracts, and decentralized systems, which present entirely new categories of risk. Traditional insurers struggle to assess risk when assets are stored across anonymous, decentralized networks without centralized oversight.
Underwriting smart contract code is particularly challenging, as it requires deep technical audits to identify potential vulnerabilities, and even then, exploits can occur in unforeseen ways. Furthermore, with no centralized entity to manage claims or enforce regulations, traditional insurance models find it difficult to operate in the decentralized world.
Defining Web3 Insurance: Key Concepts
Web3 insurance represents a major shift in risk management, using blockchain to build decentralized, transparent, and automated insurance solutions for digital assets.
What is Web3 Insurance at its Core?
At its heart, Web3 insurance replaces centralized insurers with decentralized risk-sharing pools. Users contribute liquidity and share risks, covering threats like smart contract exploits, exchange hacks, and NFT thefts through collective participation and governance.
Leveraging Blockchain Technology for Transparency
Blockchain’s public ledger ensures every claim, payout, and policy decision is immutably recorded, enhancing auditability and reducing fraud through tamper-proof records.
The Role of Smart Contracts in Automation
Smart contracts automate claims, payouts, and policy management, enabling instant responses to events like verified hacks without human intervention or delay.
Decentralization: Moving Away from Central Intermediaries
Web3 insurance removes traditional gatekeepers, typically giving power to governance token holders who vote on claims and protocol upgrades. This decentralization improves cost efficiency, transparency, and system resilience.
How Does Web3 Insurance Work? The Mechanics Explained
Web3 insurance operates through decentralized protocols that blend blockchain infrastructure, smart contract automation, and community governance to create transparent, trustless risk management systems. Here's how it works, based on models like Nexus Mutual’s framework.
Decentralized Risk Pools and Membership
At the core, Web3 insurance protocols create decentralized risk pools funded by members who join after verifying their identity and staking governance tokens. Members can be cover purchasers, capital providers, or claims assessors. Risk pools are managed by experts who set pricing and coverage limits based on historical data and real-time market demand.
Smart Contract Automation
Smart contracts automate key processes. Policies are issued as tokenized NFTs, allowing easy adjustments or transfers. Premiums are dynamically calculated, factoring in staked capital and claims history. Claims are submitted with proof of loss and assessed through token-weighted voting. Successful claims are paid out within 24–48 hours, while a deposit system deters fraudulent claims.
Decentralized Governance
Protocols use DAO structures where members vote on decisions like launching new coverage products or treasury spending. Governance tokens cap individual influence to prevent centralization, and advisory boards handle emergencies with a multi-signature consensus system.
Risk Mitigation Features
NFT policies allow partial claims, preserving remaining coverage. Users can also stack coverage across DeFi protocols. Immutable blockchain records deter fraud, and dishonest assessors face token-burning penalties.
Economic Incentives
Each role is rewarded: stakers earn APY from premiums, claims assessors get ETH rewards, policyholders reclaim deposits upon successful claims, and voters receive protocol fee distributions.
Common Types of Web3 Insurance Coverage
Different web3 insurance protocols tend to offer different types of coverage for certains scenarios. Here are the most common types of Web3 insurance coverage:
Smart Contract Failure Insurance
Smart contracts, while revolutionary, are not immune to bugs or exploits. Smart contract failure insurance protects users against losses caused by code vulnerabilities, logic errors, or external exploits that result in unauthorized fund transfers or protocol failures.
Custodial Risk Insurance
This coverage is designed for users who entrust assets to centralized exchanges, custodians, or wallet providers. It insures against losses from hacks, internal fraud, or operational errors, addressing the centralized risks that persist even within a decentralized world.
Exchange Hack Coverage
Given the frequency and scale of exchange breaches (like the $308M DMM Bitcoin hack), exchange hack insurance protects users against the theft of funds from centralized trading platforms, whether due to hot wallet compromises or insider attacks.
Depeg Insurance
Stablecoins and liquid staking tokens can lose their pegged value under stress. Depeg insurance reimburses users when assets like USDC or stETH deviate significantly from their intended value, protecting against market instability.
NFT and Metaverse Asset Insurance
As digital ownership expands into NFTs and metaverse platforms, coverage for high-value digital assets — including theft, hacking, or smart contract vulnerabilities — is becoming increasingly important.
DAO Treasury Insurance
Decentralized Autonomous Organizations (DAOs) manage significant treasuries. Specialized insurance products now protect DAO funds from smart contract bugs, governance attacks, and malicious proposals.
Key Players and Platforms in the Web3 Insurance Space
The Web3 insurance space is rapidly evolving, led by innovative platforms that offer decentralized, community-driven coverage.
Nexus Mutual is a pioneer, providing smart contract cover and protection against protocol failures. InsurAce offers multi-chain insurance services, focusing on both DeFi and centralized exchange risks while also providing competitive premium rates. Etherisc develops decentralized insurance protocols for a range of industries, from crop protection to flight delay insurance.
Conclusion: Is Web3 Insurance Right for You?
The everyday crypto trader or user likely won’t need web3 insurance, although some might prefer platforms with coverage.
However, DeFi protocols, institutions, exchanges, and other major players in the Web3 space should seriously consider it. For these larger entities, assessing the type of coverage needed is crucial, whether for smart contract failures, platform hacks, or operational risks.
They can either partner with existing Web3 insurance providers like Nexus Mutual or InsurAce, or build their own protection mechanisms. Binance, for example, developed Secure Asset Fund for Users (SAFU), which safeguards users in case of hacks.
Proper coverage can help maintain trust and stability in an unpredictable environment.
