Protocols offering cover against contract failure operate as insurance markets with specific structural difficulties.
The product
Payment on defined trigger events, generally a loss of funds from a specified protocol.
Which is closer to a parametric product than to conventional indemnity insurance.
Whether an event triggers cover is determined by defined criteria or by a governance process.
The pricing problem
Conventional insurance prices from historical frequency data.
Which does not exist in useful quantity for smart contract failure.
Pricing therefore relies on assessment of code quality, audit history, time deployed and value at risk.
Correlation
Insurance works when losses are independent.
Which they are not here, since a widely used library flaw affects many protocols simultaneously.
This correlation is the central obstacle to scaling capacity.
Capital efficiency
Capital must be held against potential claims.
Which limits how much cover can be written and makes it expensive.
Some designs pool capital across risks, which improves efficiency and increases correlation exposure.
Claims assessment
Determining whether an event falls within cover.
Which has been contested in practice, including disputes over whether a loss was a contract failure or an economic design failure.
Governance-based claims decisions carry conflicts, since claim payers may also be claimants.
Exclusions
Typically exclude losses from user error, from key compromise and from certain governance actions.
Which are substantial categories.
Reading exclusions determines what the cover means, as with any insurance product.
Capacity constraints
Available cover is a small fraction of value deposited across the sector.
Which means the market cannot absorb a large systemic event.
Attempts to attract conventional reinsurance capital have had limited success given the correlation problem.
Assessing a policy
Trigger definition, exclusions, claims process, capital backing and historical claims payment record.
This describes how these products work and is not advice about using them.
Underwriting models
Some protocols use capital providers choosing which risks to back.
Which distributes underwriting judgement across many participants.
Others pool capital and allocate centrally through governance, which is simpler and less granular.
Claim disputes
Where a loss falls in a grey area between covered and excluded events.
Which has produced contested decisions with reputational consequences.
Independent assessment mechanisms have been introduced to address the conflict.
Pricing signals
Cover cost for a protocol is a market assessment of its risk.
Which is genuinely informative and is watched for that reason.
A protocol where nobody will write cover at any price is telling you something.
Conventional insurance interest
Traditional insurers have entered selectively, generally for custody rather than contract risk.
Which reflects that custody risk resembles risks they already price.
The realistic position
Cover reduces exposure partially, is limited in capacity, and should not be treated as making a deposit safe.
Custody cover
Insurance against custodian failure resembles conventional crime and specie cover.
Which is why traditional insurers participate here more readily.
Limits are generally well below total assets held, which is worth understanding.
Depeg cover
Products paying out if a stable-value asset trades below a threshold.
Which has been triggered in practice during banking stress events.
Trigger definitions including duration requirements determine whether brief deviations count.
Slashing cover
Protection against validator penalties.
Which is offered by some providers to delegators.
Given that slashing is almost always operational error, this is closer to a service guarantee than to insurance.
Capital provider returns
Those backing cover earn premiums and bear claims.
Which is an underwriting position rather than a yield product, whatever it is called.
Understanding that distinction before providing capital is the essential point.
Market size
Total cover written remains small relative to value deposited across the sector.
Comparing cover
Trigger definition, exclusions, capital backing, claims history and the assessment process.
Which are documented and vary substantially between providers.
A provider that has paid claims has demonstrated something a newer one has not.
The structural constraint
Correlated risk and limited capital mean the market cannot cover a systemic event, and that is unlikely to change soon.
Why capacity stays small
Capital providers require returns commensurate with genuinely uncertain risk, and buyers resist paying premiums that reflect that uncertainty.
Which leaves the market clearing at a small size.
This gap has persisted since the products were introduced and there is no obvious mechanism that closes it.
Better historical loss data would help and accumulates slowly, one incident at a time.
What buyers should expect
Partial cover, defined triggers, meaningful exclusions and a claims process that may be contested.
Which is an accurate description of most insurance and is worth stating plainly here.
Treating cover as making a deposit safe is the error that the exclusions are designed to correct.
A last note
Insurance works when losses are independent and history is long. Neither condition holds here, which is why the market remains small and why that is unlikely to change quickly.
Cover is a partial hedge rather than a safety net, and pricing it honestly is the hard part.