A Comprehensive Understanding of the DeFi Risk Management Market and the Insurance Protocol Risk Harbor

Original link: 《DeFi Risk Management》 Original author: Paul Veradittakit, Founding Partner of Pantera Capital Translator: Lu Jiangfei

At this stage, the situation of attacks exploiting DeFi vulnerabilities is becoming increasingly severe, with funds stolen due to attacks in the DeFi ecosystem reaching as high as $400 million in the past year alone, including some mature, audited projects such as Yearn.Finance and THORChain.

Undoubtedly, hackers have become a significant pain point for stakers, liquidity providers, and other DeFi participants. However, some of the risk management tools currently available in the industry are still limited to areas such as audits, on-chain monitoring, and primitive insurance, such as the current insurance protocol Nexus Mutual (which has been detailed in previous articles, see 《Decentralized Insurance》).

On June 24, a newcomer in the DeFi insurance space, Risk Harbor, announced the completion of a $3.25 million seed round financing, co-led by Framework Ventures and Pantera Capital, with participation from Coinbase Ventures, Digital Currency Group (the parent company of CoinDesk), aiming to provide a new option for protecting DeFi users' assets.

What is Risk Harbor?

Launched on the mainnet in June this year, Risk Harbor is based on an automated and transparent insurance claims process. Its underwriting services now cover selected assets from several leading DeFi protocols, including Yearn.Finance, PoolTogether, Aave, Compound, Pickle, Harvest Finance, and BarnBridge.

Additionally, Risk Harbor has launched a comprehensive software development kit (SDK) to quickly expand and integrate with various DeFi protocols on different blockchains. Meanwhile, as a newcomer in the insurance space, Risk Harbor has two significant advantages:

1. Parametric Insurance. Risk Harbor processes claims algorithmically, while Nexus Mutual decides whether to provide claims through governance means. In other words, Nexus Mutual's insurance underwriters "manually" verify each payment request, and there are also some issues with Nexus Mutual's claims mechanism, where rejecting more requests can lead to economic incentives. In fact, over 80% of Nexus Mutual claims have been denied. Risk Harbor, on the other hand, resolves claims parametrically: if a predetermined event occurs (for example, if yUSDC tokens are stolen from the Yearn.Finance protocol), policyholders can receive compensation within 45 seconds or 3 blocks, making the entire claims process transparent, automated, and fast.

2. Capital Efficiency. Purchasing insurance on Nexus Mutual typically requires an annual premium of 2-3%, depending on the rates set by the protocol, and future rates are likely to only increase. In contrast, Risk Harbor's underwriting process is more efficient and highly composable, supporting almost all underwriting assets, including some productive assets. Therefore, Risk Harbor can offer the industry's lowest insurance rates, with many DeFi protocols on the platform having annual insurance rates of less than 1%.

How Does Risk Harbor Protect Users' DeFi Assets?

The first step in using Risk Harbor is very simple: purchase coverage that can protect your DeFi positions. In fact, compared to the cumbersome front-end service processes of other DeFi insurance platforms, purchasing insurance on Risk Harbor is very straightforward.

First, we need to check Risk Harbor's liquidity pools and find the assets we want to insure. As of the time of writing, Risk Harbor offers 6 protected assets: yvDAI, bbcUSDC, fUSDC, bbamDAI, bbamUSDC, and bbamUSDT. Before purchasing parametric insurance from Risk Harbor, we must hold one or more of these assets and ensure that these assets are placed in our DeFi wallet (such as MetaMask, WalletConnect, or Fortmatic).

Next, we need to find the asset pool we want to purchase insurance for. For example, we can choose Barnbridge's Compound USDC Junior asset pool, then click the "Protect" button, and enter the amount of bb_cUSD tokens we wish to insure.

From the screenshot above, we can visually see the insurance underwriter's display, where the blue line shows the premiums collected by the insurance underwriter and the amount of the liquidity pool already used. Additionally, under the "Default Ratio," we can see the exact conditions for insurance payouts— as shown in the image, if 1 bb_cUSDC falls below 0.5218 USDC, it is considered a "default."

At this point, we just need to click the "Purchase" button and agree to allow the browser wallet to receive subsequent notification messages, indicating that our assets are now protected by Risk Harbor's algorithms.

If we want to file a claim afterward, the process is also simple and can be completed in four steps. For details, please visit this link.

Recently, the Risk Harbor team also released a "Hacker Simulator," allowing users to simulate protocol hacks, file claims, and simulate receiving payouts, all conducted on real-time contracts. If you are interested in better understanding Risk Harbor's claims process and how the claims mechanism works, you can try using the "Hacker Simulator" here.

How Can Users Earn Returns?

In Risk Harbor, we can also play another role: insurance underwriter. Insurance underwriters bear the downside risk of payout events, and in exchange, underwriters can earn attractive returns from their capital. The process of participating as an insurance underwriter in Risk Harbor is actually very similar to the process outlined above, but we will provide a detailed explanation here.

First, we need to choose an asset pool to provide liquidity for. Depending on the selected asset pool, different assets may need to be deposited: for example, the fUSDC asset pool requires cUSDC to underwrite insurance, while bb_cUSDC requires yvUSDC.

For instance, suppose we want to underwrite insurance for the bb_cUSDC asset pool; we would need to provide yvUSDC tokens, and the process of obtaining yvUSDC is quite simple:

1. Deposit the required amount of USDC into your wallet;
2. Go to Yearn.Finance and deposit the tokens into the USDC pool;

After completing these two steps, we should have an equivalent amount of yvUSDC in our wallet.

Next, click on the "Underwrite" option for the asset pool and enter the amount of liquidity you wish to provide. In addition to entering the amount, you can also choose a "Price Point" or select the fee you wish to charge insurance buyers. It is important to note that the higher the fee set, the lower the likelihood that the corresponding insurance contract will be purchased; liquidity providers (LPs) can seek the utilization/fee "sweet spot" and obtain incentives in this way, similar to the centralized liquidity provision feature recently launched by Uniswap V3. Once the parameters are set, click the "Deposit" button.

Now, we can earn returns from the liquidity provided, and Risk Harbor allows users to stake their underwriting positions to earn additional rewards, meaning our returns will increase.

To do this, we need to go to the "Stake" option, select our position from the dropdown menu, and then click "Stake." For staking, in addition to earning underwriting fees, we can also earn Risk Harbor governance tokens (note: this governance token will be launched soon) through untradeable ticket tokens. The lower we set the "Price Point," the higher the staking rewards we will receive, which is another incentive to lower end-user fees.

Conclusion

The DeFi space is currently on the brink of explosion. With the growing scale and innovative gameplay of the DeFi market, the corresponding risk exposure is also increasing, which is bound to lead to a surge in demand for on-chain native insurance.

However, although there are already many DeFi insurance protocols in the market, none have maximally addressed the pain points of the market to achieve explosive growth, leading to stagnation. Therefore, we can expect more newcomers in the DeFi insurance space, such as new insurance protocols, coverage of more risk types, and better risk assessment models.

Risk Harbor, dedicated to becoming a user-friendly insurance solution, is one of the strong explorers in this field and deserves continued attention.