By connecting a web3 wallet to a decentralized insurance platform, you can protect your cryptocurrencies and other digital assets from on-chain risks. For an in-depth look at decentralized insurance, please read What is crypto insurance?
This article covers buying and claiming insurance in DeFi with step-by-step instructions for Nexus Mutual, a leading decentralized insurance platform.
Table of contents
The Basics of Insurance in DeFi
Blockchain increases efficiency by reducing the high costs and long processing times associated with traditional insurance companies.
Decentralized applications (DApps) can further increase efficiency and transparency gains over traditional insurance companies. They are more cost efficient by needing less overhead in terms of workforce, materials, and real estate. DApps are faster by using more automation via smart contracts, never sleeping (there are no DeFi business hours or holidays), and using a wider pool of people to asses risk. They are more transparent because assessments are done on-chain by members of the DeFi insurance protocol. By contrast traditional insurance claims are still decided in-house and with little to no insight into the opaque decision making process.
Introduction to Nexus Mutual
Nexus Mutual is a leading decentralized insurance platform with a focus on on-chain products, such as smart contract cover to protect against smart contract bugs and hacks. It is a UK-based business, structured and governed as an Ethereum-based DAO wholly owned by its members. Members' funds are held in a risk sharing pool and used to pay out claims. The community is involved in assessing and accepting coverage proposals and funding the pools through the platform’s token, NXM. NXM is used to purchase insurance coverage and participate in governance.
You can read more about WalletConnect here.
Here’s a guide for how to use WalletConnect.
Key Terms Relating to Insurance in DeFi
Cover: This refers to the protection provided by an insurance policy, which pays for specific losses or damages the policyholder may experience. The types of losses covered depend on the cover purchased, and are spelled out in the conditions of the policy.
Claim: A claim is a request for payment made by a policyholder to the insurance platform for a covered loss or damages, as per the terms of the policy. The insurance platform reviews the claim, and if approved, pays for the covered losses up to the policy limits.
Protocol: DeFi protocols are DApps that enable some kind of financial activity, such as swapping, lending, trading derivatives, and buying NFTs. This is often a type of cover, i.e., “protocol cover.” Purchasing a protocol cover policy for a specific protocol protects against losing assets held on that platform.
How to Buy Crypto Insurance
To get started buying crypto insurance, you will first need a reason to need insurance. House insurance is hardly useful if you haven’t purchased a house yet! Decentralized insurance platforms offer different categories of cover. Within a category they offer different specific instances. For example, many platforms offer some form of protocol protection, but one platform might not cover a specific DApp you use.
Here are some things you can do within DeFi that might be worth getting insurance for:
Yield farm on a DEX: Learn about DeFi farming and get step-by-step instructions in How to yield farm in DeFi. Get cover for DEXs.
Custody crypto: While it isn’t recommended to keep cryptocurrency or digital assets on centralized exchanges due to insolvency risks, if you must do so, it is wise to get insurance protection.
Once you have a need for crypto insurance, find a DeFi insurance platform that offers protection for it. We are going to use Nexus Mutual to get protocol cover for Aave, a leading decentralized lending platform. Check out these articles on how to lend and borrow, which provides step-by-step instructions for using Aave.
In order to use Nexus Mutual, you will have to become a member. After that, you can use Nexus Mutual’s functions, which includes buying cover, buying and staking NXM, and participating in governance.
Become a member
A welcome screen will indicate you must become a member.
Scroll down and press the “Pay membership fee” button to pay membership fees.
After that, you will have to complete a Know-Your-Customer (KYC) / Anti-Money-Laundering (AML) procedure. Submit the required documents and wait to be approved. If you fail this process your membership fee will be refunded.
Press the hamburger menu button in the top left corner, then tap “Buy cover.” You can filter the cover options by “Yield token,” “Protocol,” and “Custodian.” If you are unfamiliar with those terms, you can read about it by tapping, “Reading more” beneath each category.
We are going to buy cover for the decentralized lending platform, Aave. This is a DeFi protocol, so it can be found by choosing “Protocols” from the filters and looking through the list, or simply by typing, “Aave” in the search field. When you have found Aave, press the “Get quote” button for it.
Under the “Quote details,” choose the period of time you want cover, and the amount of protection you need. The protection amount can be expressed in ETH or DAI.
Scroll down to read the terms and conditions and the summary. The summary includes how much your cover will cost, which you can choose to pay in ETH or NXM, the native token of Nexus Mutual. After you have read carefully, click the box indicating you have read the terms and conditions.
Under the terms and conditions, ****you will see the option to pay in either ETH or NXM. The protocol needs you to grant permission over the use of whichever crytpoasset you wish to pay with. You can approve only the asset necessary for payment or you can approve an unlimited amount. If you approve for unlimited, you will not have to reapprove if you wish to buy more cover in the future. Press the number on the left or the “infinity” sign on the right for specific or unlimited approval respectively. Then, approve the transaction in the Bitcoin.com Wallet.
After granting permission to use your crypto, the “Buy cover” button will become bright green indicating you can proceed to pay. Press the button and approve the transaction in the Bitcoin.com Wallet.
Once the transaction is approved, you can review your cover by pressing the hamburger menu at the top left corner and Pressing “Home.” Then press the right arrow to see “My covers.” You will see your active and expired cover policies. The menu presents information by Cover ID, Project, Cover Amount, Cover Period, Premium, and Action.
How to Make a Claim on your Crypto Insurance Policy
To make a claim, you must have a loss of funds that is included in your cover. Check the cover wording to make sure the loss qualifies. Here are the Cover categories for Nexus Mutual:
2 claim limit per cover
It is important to make sure your loss qualifies under your cover policy, because you only have two opportunities to file a claim for each cover policy you hold.
When you buy a cover policy, 10% of the tokens from your premium are set aside for filing claims. If you file a claim, half of the reserved tokens are used to stake during the claims assessment process. If the claim is approved, you will receive a payout and the staked tokens will be returned. However, if your claim is rejected, you will not get a payout and the tokens that were staked will not be returned.
Make a claim
From the hamburger menu in the top left corner, tap “Home.” Then press the right arrow to see “My covers.”
You will see your active and expired cover policies. The menu presents information by Cover ID, Project, Cover Amount, Cover Period, Premium, and Action. To file a claim, click “Claim” under the “Action” field.
To open a claim is a 4-step process: Incident details, Add affected addresses, Submit proof, and Submit claim.
Incident details: This is a overview of the loss. Provide a description of the loss, screenshots of any information that may help Claims Assessors, or off-chain evidence. On-chain evidence (i.e., transaction hashes, wallet addresses, etc…) are given in the next steps. Once you have filled out the incident details, click the green “Continue” button.
Affected addresses: You must prove that you control a wallet or wallets that suffered losses. The way to prove this is by signing a transaction from the wallet or wallets. You can either:
Sign a message from the affected address and submit through the Nexus interface as your proof of loss.
Make a 0 amount transaction to a specified address. If you are filing a claim from another address, you can send 0 ETH from your other wallet to your whitelisted address.
In this step, add the wallet addresses and choose a proof type. If you have more than one affected wallet address, you can add more by tapping “Add more wallet addresses.” Once you have finished, click the “Continue” button. Next you will verify the addresses you have added. Follow the instructions to verify by singing a message with the affected wallets, or making a 0 amount transaction to a specified address.
Submit proof: Tap “Submit Proof” to start the proof transaction.
Submit claim: In the last step, you will review the guidelines for the submission process. Read through the information and click “Yes” to the questions asked. After selecting “Yes” to both questions, you will be able to submit your claim. Tap the “Submit Claim” button.
Once the claim transaction is confirmed, you can see the status of it by tapping “Claims” from the top left hamburger menu button, then tapping the “My claims” button. The claims process usually takes approximately 72 hours.