NFTs will be the next catalyst for Defi insurance protocols
NFT insurance seems like a no-brainer
The crypto community witnessed the narrative rotate from deFi in the summer of 2020 to a significant rally in layer one blockchains such as Kadena and Solana in 2021. Afterwards, we saw a big rally in gamefi metaverse projects such as Decentraland, The Sandbox, Aavegotchi, and Neo Tokyo, to name just a few. We witnessed significant rotation into DAOs and NFTs. It seems like we will see a cycle into layer zero and interoperability blockchains, with IOTA, Cosmos, and the aptly named upcoming 'Layer Zero' as examples.
In one of CBResearch's articles, we discussed Armor Finance (see Crypto Spotlights: Defi Insurance Part 1). Since then, the project has faced several internal hurdles in addition to broader market downward volatility, which has resulted in a whopping 98% drawdown in price. A 98% drawdown. Ouch! This level of price depreciation brings to mind the bearish crypto Twitter adage: "Just because your favourite coin has dropped 90% doesn't mean it can't drop another 90%." The price of Armor Finance tokens is also a reminder that investing in cryptocurrencies can be extremely risky and costly.
Nonetheless, the spate of hacks in the crypto industry lends significance and urgency to the idea of a decentralised insurance brokerage. But given that the global ownership of cryptocurrencies stands at between 2% and 4%, and Defi is even more nascent, this makes Defi insurance super-niche. Hence, Defi insurance will only see wider adoption when it becomes appealing for mass consumption like NFTs because people gravitate towards culture, art and entertainment more than the liberal ideal of decentralisation, as the market activity has shown.
Did you catch the idea in the statement above? If not, here is a more straightforward explanation: Defi insurance will see mass adoption when applied to NFTs. Currently, the NFT narrative comprises digital art. Still, there is no question about its future application in other forms of art and entertainment as a decentralised royalty payment tool or in property ownership - imagine an NFT representing land ownership. These use cases present a strong argument for implementing insurance protocols for NFTs. Even while NFTs are primarily digital art, there has been a spate of NFT thefts from newbies in the market. This influx of inexperienced retail investors into the space also presents a strong case for insured NFTs.
Perhaps the true catalyst for insurance in the crypto space is its application to NFTs. Only time will tell, but it is a brilliant idea in one's humble opinion.
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