When the algorithmic stablecoin Terra $UST forked in May 2022, many feared that the crash would lead to a systemic crash of the entire cryptocurrency industry. Dan Thomson, Chief Marketing Officer of leading DeFi platform — InsurAce, shares how their immediate insurance payouts to over 155 victims who lost funds in the accident helped maintain investor confidence in DeFi at such a critical time.
On May 6, 2022, news broke on major crypto channels that the algorithmic stablecoin Terra-$UST had lost its connection, leading to widespread investor panic. And within an eventful 48 hours between May 12 and May 13, 2022, the price of the then $18 billion MarketCap algorithmic stablecoin Terra USD ($UST), which was supposed to hold a $1 peg, fell below 35 cent on May 9. Its sister token, $LUNA, which was meant to stabilize the price of $UST, fell from $80 to near zero.
No, thanks to this catastrophic collapse of the Terra ecosystem, thousands of investors scattered all over the world lost over $40 billion – consequently, the world of DeFi threatened to fall apart, until Stablecoin De-Peg Covers came to the rescue.
What is Stablecoin Insurance?
Stabilcoins are special digital assets that play the traditional role of money in the blockchain world. They are cryptocurrencies that have their value tied to a specific fiat currency or in some cases, a basket of currencies.
When designing stablecoins, issuers must navigate the trilemma of decentralization, security, and stability to find the optimal reserve mechanism to support their tokens. Asset-backed stablecoins are more stable, they are often largely centralized. And that means users can be exposed to vulnerabilities from a single point of failure, as well as censorship and restrictions from regulators.
And while algorithmic and crypto-backed stablecoins are more secure and decentralized, even when they are over-collateralized, they present a high risk of going bust during adverse market conditions.
To mitigate these risks, DeFi protocols have created Stablecoin De-peg Covers to protect stablecoin users and investors from certain de-pegging events.
InsurAce was one of the DeFi protocols that made the most impactful responses to the recent high-profile stablecoin de-peg that occurred in the Terra ecosystem.
During a recent interview, InsurAce CMO Dan Thomson revealed how the timely intervention of the DeFi protocol helped to save the day.
“The main reason our response was effective was because of how timely and efficient it was,” Thomson said.
“On May 13, barely 48 hours after the $UST de-peg event, we issued a press release to set in motion the loss claim process for $UST investors. We published a user guide that provides clarity on coverage specifications and claim eligibility. With a 7-day claims window, we set a goal to provide immediate support to victims and send a reassuring statement to the rest of the DeFi world. he added.
How InsurAce reacted to the $UST crash
With a streamlined claims process, InsurAce drew praise globally for providing timely intervention to $UST investors who had hedged their $UST stablecoins with InsurAce. The quick response from InsurAce helped restore investor confidence in DeFi as users quickly replenished amid a horrific market-wide downturn.
Total Covers Sold: 234
Total amount of coverage: $22,158,820
Total requests: 173
Total claim amount (USD): $12,474,477.84
Total number of rejected requests: 18
Total value dropped from Luna Drop (USD): $177,692
Total claim amount after deductions (USD): $11,730,758.24
InsurAce — $UST Baptism Payment Summary
More importantly, an in-depth look at the chain’s claims data showed that InsurAce took a significant hit in the process. According to an updated report published by the Protocol Advisory Board, the protocol has estimated ~$11.7 million in USD unlink claims. Collecting only $94,000 in premium payouts, such a high rate of successful claim payouts showed that the platform had outstanding risk management strategies in place prior to the crystallization of the De-peg risk.
When asked about the payment decision-making process, Thomson explained that InsurAce implemented a community-driven approach, with its independent local government retainers ($INSUR.) executing the claims assessment process.
“Decentralized voting was conducted by the community of InsurAce Claim Assessors who hold and stake $INSUR Tokens. And at the end of the Voting process, they approved a total of 155$UST de-peg Cover claims and rejected 18 as ineligible in accordance with the Stablecoin de-peg Cover terms and conditions. Thomson continued.
Compensation for ecosystem investors and shareholders
When asked how InsurAce plans to compensate its underwriters for their role in the $UST De peg event, Thompson responded by saying that InsurAce has since unveiled a Stakers Compensation Plan to help reduce losses to underwriters. protocol that have used their assets as part of the UST $ payments.
“In addition to improving our risk management strategies, we have put several plans in place to mitigate losses caused by actors. Over the next 12 months, a fixed amount will be paid to a pool on the chain from which participants can withdraw their compensation. The scalable approach will help us ensure that we can help players recover some of their losses, while maintaining healthy liquidity in the InsurAce protocol.” Thomson concluded.
The $UST crash remains one of the biggest tests for DeFi as a whole, mitigated in part by the safety nets from protocols and signatories working hard to protect the space. With the continued presence and efforts of protocols like InsurAce to protect users in the space, DeFi is rapidly evolving into an increasingly safe, sound and sustainable global alternative to traditional finance, one where individuals have more control and autonomy. big on their finances.
InsurAce.io is a leading decentralized multi-chain protocol that provides reliable, robust and secure risk protection services to DeFi users, allowing them to protect their investment funds against various risks.
With InsurAce.io, users can rely on:
- Unbeatable low coverage premiums
- Zip cover
- Multi-chain accessibility
- Stable returns on investments (via our Investment Portal and Mining Program)
Since its debut in April 2021, InsurAce.io has built a full-spectrum product line covering 140+ protocols, 3 CEX and 1 IDO platform running on Ethereum, as well as Solana, BNB Smart Chain, Polygon, Fantom, Gnosis, Arbitrum, Avalanche, Harmony, Celo, Cronos, Boba, ICON, Ontology, Moonriver, Moon Beam, Bifrost, Aurora and Optimism. InsurAce.io currently has a live product deployed on Ethereum, BNB Smart Chain (BSC), Polygon and Avalanche.
InsurAce is led by founders Oliver Xie, Sum Wu and Dan Thomson (@vagrantcrypto) with a globally distributed team of insurance and web3 experts.