Billions of Dollars in Crypto Assets Exposed to Risk: Who Will Insure Them?

From a single fund pool to layered underwriting, who will bear the first loss.

Written by: @blocmates

Compiled by: AididiaoJP, Foresight News

Interest in solving insurance issues in the crypto space has long been insufficient, as evidenced by the industry's typical responses to tricky problems. Insurance can be said to be the most important aspect of crypto today, and the industry urgently needs new metrics to demonstrate significant progress from the current state.

Let’s recall, when was the last time there was a two-month period without news of a protocol treasury being hacked? ------ Never.

DeFi protocols and various smart contracts remain vulnerable to attacks, and trust is slowly eroding.

From January to May 2026 alone, there were over 50 incidents, with total losses exceeding $840 million, a 70% increase compared to the same period in 2025. If we look at the recent figures, this number has surpassed $2.68 billion.

The problem is clear: the existing security infrastructure of on-chain financial systems is weak, leaving users in a vulnerable state. However, hacker incidents themselves are no longer as attention-grabbing; the industry seems to have normalized them. What is truly concerning is what happens afterward.

What About Insurance?

On April 18, attackers drained 116,500 rsETH, worth approximately $292 million, through KelpDAO's LayerZero bridge, marking one of the most significant DeFi attacks of the year.

These unsupported tokens were transferred to Aave as collateral, resulting in approximately $190 million in bad debts, triggering contagion.

In response, Aave froze the related markets, and its Total Value Locked (TVL) plummeted from over $26 billion to below $14 billion within days. Currently, Aave's TVL is around $18.8 billion, indicating a recovery.

Such attacks can affect multiple protocols and users; in the KelpDAO incident, at least nine protocols were impacted.

Although rsETH has fully recovered, what truly draws attention is the industry's reaction after the attack.

Any traditional financial observer would immediately ask where the insurance is, only to find that the industry's response resembles a makeshift fundraising effort: protocols that happened to be too close to the fire supported each other ------ DeFi United, a coordinated rescue operation led by Aave service providers after the aforementioned rsETH incident.

But this is not surprising. The crypto "insurance" industry has been shrinking. The total locked value of on-chain insurance protocols is currently $126 million, down from a historical high of $1.9 billion in November 2021.

One reason for the shrinkage may be that many early on-chain insurance protocols were built on a single mutual aid model ------ a shared fund pool covering broad risks, with governance, underwriting, claims assessment, and capital management all tied to the same system.

This structure simplifies coordination but also centralizes exposure, turning the protocol itself into a single point of failure.

Capital providers bear the losses of the entire portfolio rather than clearly defined segmented losses, making it difficult to isolate tail events, accurately price exposure, or allocate capital with any precision; once a position blows up, everyone in the pool bleeds, regardless of what they thought they were insuring.

In response, both established and new risk protection protocols have begun to draw on traditional insurance, reinsurance, and structured finance.

The thinking starts from a sharper question: who bears the first loss? Then it shifts to segmenting capital by risk characteristics, establishing dedicated pools or treasuries, allowing providers to choose the exposures they truly want.

The Landscape of Protocol Protection

In traditional insurance, equity or specific reinsurance layers typically absorb initial losses. In early DeFi protection, staked capital providers (underwriters) usually bore the first loss in a shared pool.

However, as mentioned earlier, this is changing. Providers can now choose more conservative backstop layers or higher-yield, riskier tranches while enhancing overall capital efficiency and capacity.

Here are some protocols in this category.

Nexus Mutual

Nexus Mutual remains a veteran protocol in the on-chain protection space but has evolved into a more refined risk profiling system that allows for layered protection.

The way it works is that users purchase "cover" for specific protocols, custodians, yield tokens, or de-pegging events.

Capital providers stake NXM (or wrapped versions) for underwriting; they earn premiums but bear the first loss during claims. Claims are assessed through member voting or structured processes.

Nexus's risk products have expanded beyond pure smart contract risks to include custodial, confiscation, and even hybrid products, such as crypto kidnapping and ransom protection (in partnership with traditional partners for response and ransom reimbursement).

Nexus Mutual currently segments capital into over 70 specific protections rather than a single fund pool. Stakers bear the first loss, but diversification and efficiency tools reduce systemic pressure.

Nexus Mutual also collaborates with distributors like OpenCover to facilitate easier access and packaging of products (e.g., the "Base DeFi Pass" for multi-protocol protection on Base).

OpenCover

OpenCover acts as a distribution and structuring layer for on-chain insurance, simplifying the path to obtaining protection across multiple underwriters, with most capacity currently provided by Nexus Mutual.

In addition to aggregation, the platform is developing new risk management products on top of existing protection infrastructure.

Its flagship product, Covered Vaults, is launched in collaboration with Nexus Mutual, Morpho, Kiln, and Symbiotic.

Users can deposit into supported vaults and choose to activate protection by staking vault shares, covering specific technical and economic loss events while remaining within the underlying strategy.

OpenCover's "Covered Vaults" approach shifts DeFi insurance from standalone policies to integrated, portfolio-level risk management.

Firelight Protocol

Another noteworthy protocol comes from the XRP ecosystem ------ Firelight.

Firelight explicitly addresses who bears the first loss while advancing capital segmentation and drawing on concepts from traditional insurance and structured finance.

The protocol assigns first loss bearers to stakers in the protection treasury. They bear the primary risk. Its capital directly supports payouts for effective claims, forming a benefit binding similar to traditional mutual or pooled underwriting models.

In terms of capital segmentation and specialized structures, Firelight uses dedicated non-custodial treasuries and protection pools rather than a single fund pool.

This allows for more granular risk exposure and capital allocation, with staked assets (especially large-cap, low-correlation assets like XRP) being specifically chosen to enhance capital efficiency and resilience.

Built-in Protection

A few protocols take on the challenge of underwriting risk, while most crypto or DeFi protocols adopt a built-in approach.

Platforms in this category design risk controls such as automatic stop-loss, liquidation buffers, and downside caps into the core mechanisms of leveraged tokens and yield vaults.

This shifts the burden of first loss protection from external underwriters to the product architecture itself, allowing users to achieve higher yields while programmatically limiting tail exposure through rules.

Some examples include:

Gearbox Protocol provides credit accounts for leveraged farming and strategies, incorporating liquidation protection and risk isolation within each account.

Dolomite offers a money market with structured lending features and customizable risk parameters to limit excessive exposure.

Toros Finance provides leveraged tokens with embedded stop-loss logic and recovery mechanisms, capping losses without manual intervention.

This integrated approach draws on structured finance, embedding protective measures directly into the tools themselves.

It reduces friction for users seeking protection who do not need to purchase separate policies and allows protocols to handle routine product-level risks more efficiently than broad mutual aid models.

Conclusion

In reality, the development speed of on-chain risk protection economics still lags far behind the speed at which attacks occur.

The gap is significant, but these discussions are worth having. For on-chain insurance to develop, the industry needs to move away from an obsession with Total Value Locked (TVL) and instead focus on voices calling for more important metrics ------ Total Value Covered (TVC).

Currently, the proportion of DeFi's locked value that is clearly covered is less than 2%. To reignite trust in DeFi, TVC is the metric to focus on, and the gap between locked value and what is covered presents a huge opportunity for anyone who can fully address the crypto insurance crisis.

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