Interest in addressing insurance issues in the crypto space has long been insufficient, as evident from the industry’s typical response to challenging problems. Insurance is arguably the most critical component of crypto today, and the industry urgently needs new metrics to demonstrate significant progress from the current state.
Think back to the last time the crypto space went two consecutive months without a protocol treasury being hacked—it never happened.
DeFi protocols and various smart contracts remain vulnerable to attacks, and trust is gradually eroding.
From January to May 2026 alone, over 50 incidents occurred, resulting in total losses exceeding $840 million—a 70% increase compared to the same period in 2025. If we extend the timeframe to the most recent data, this figure has surpassed $2.68 billion.
The issue is clear: the existing security infrastructure of on-chain financial systems is weak, leaving users vulnerable. But the hacks themselves are no longer as attention-grabbing—the industry seems to have normalized them. What truly matters is what happens afterward.
What about insurance?
On April 18, attackers drained 116,500 rsETH, worth approximately $292 million, through KelpDAO’s LayerZero bridge, making it one of the largest DeFi attacks this year.
These unsupported tokens were deposited into Aave as collateral, triggering around $190 million in bad debt and causing contagion.
In response, Aave froze the affected markets, causing TVL to drop from over $26 billion to under $14 billion within days. Aave’s current TVL is approximately $18.8 billion, indicating a recovery.
These attacks affect multiple protocols and users; in the KelpDAO incident, at least nine protocols were impacted.
Although rsETH has been fully restored, what truly drew attention was the industry's response following the attack.
Any traditional finance observer would immediately ask, "Where's the insurance?" and then discover that the industry's response resembled a makeshift fundraising effort: protocols that happened to be too close to the fire bailed each other out—DeFi United, the coordinated rescue initiative led by Aave service providers following the rsETH incident mentioned above.
But this isn’t surprising. The crypto “insurance” industry has been shrinking. The total value locked in on-chain insurance protocols is currently $126 million, down from a peak of $1.9 billion in November 2021.
One reason for the contraction may be that many early on-chain insurance protocols were built as single mutual models—a shared fund pool covering a broad range of risks, with governance, underwriting, claims assessment, and capital management all tightly integrated into one system.
This structure simplifies coordination but concentrates exposure, turning the protocol itself into a single point of failure.
Capital providers bear losses from the entire portfolio, not clearly segmented portions, making it difficult to isolate tail events, accurately price exposure, or allocate capital with any precision; when one position fails, everyone in the pool suffers losses, regardless of what they believed they were insuring.
In response, both established and new risk assurance protocols have begun to draw inspiration from traditional insurance, reinsurance, and structured finance.
Start with a more pointed question: Who bears the first loss? Then move toward segmenting capital by risk profile, creating dedicated pools or vaults that allow providers to choose the exposure they truly want.
Protocol-guaranteed map
In traditional insurance, equity or specific reinsurance layers typically absorb the initial losses. In early DeFi coverage, stakers (underwriters) usually bear the first losses within a shared pool.
But as previously mentioned, this is changing. Providers can now choose more conservative tranches or higher-yield, higher-risk tranches, while improving overall capital efficiency and capacity.
Here are some protocols in this category.
Nexus Mutual
Nexus Mutual remains a seasoned protocol in the on-chain insurance space, but has evolved into a more sophisticated risk profiling system, enabling layered coverage offerings.
The way it works is that users purchase "cover" (protection) for specific protocols, custodians, yield tokens, or de-pegging events.
Capital providers stake NXM (or a wrapped version) to provide coverage; they earn premiums but bear the first loss in the event of a claim. Claims are evaluated through member voting or a structured process.
Nexus's risk products have expanded beyond pure smart contract risk to include custody, slashing, and even hybrid products such as crypto kidnapping and ransom insurance (in collaboration with traditional partners responsible for response and ransom reimbursement).
Nexus Mutual currently allocates capital across more than 70 specific coverages rather than a single pool. Stakers bear the first loss, but diversification and efficiency tools reduce systemic pressure.
Nexus Mutual also partners with distributors such as OpenCover to make it easier to access and bundle products, such as the "Base DeFi Pass," which provides coverage for multiple protocols on Base.
OpenCover
OpenCover serves as an on-chain distribution and structuring layer for insurance, simplifying the process of obtaining coverage 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 its existing safeguard 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 coverage by staking their vault shares, protecting against specific technical and financial loss events, all without exiting the underlying strategy.
OpenCover’s “Covered Vaults” approach transforms DeFi insurance from standalone policies to integrated, portfolio-level risk management.
Firelight Protocol
Another protocol worth noting comes from the XRP ecosystem—Firelight.
Firelight clearly addresses who bears the first loss, while advancing capital segmentation and drawing on concepts from traditional insurance and structured finance.
The protocol allocates the first-loss providers to stakers in the collateral vault. They bear the primary risk, and their capital directly supports payouts for valid claims, creating a financial alignment similar to traditional mutual or pooled insurance models.
In terms of capital segregation and dedicated structures, Firelight uses dedicated non-custodial vaults and safeguard pools instead of a single pooled fund.
This enables more granular risk exposure and capital allocation, with staked assets—particularly high-market-cap, low-correlation assets like XRP—selectively chosen to enhance capital efficiency and resilience.
Built-in protection
Few protocols take on the challenge of underwriting risk, while most crypto or DeFi protocols adopt an embedded approach.
Platforms in this category integrate risk controls such as automatic stop-loss, liquidation buffers, and downside caps directly into the core mechanisms of leveraged tokens and yield vaults.
This shifts the burden of first-loss protection from external insurers to the product structure itself, allowing users to pursue higher yields while limiting tail exposure through programmed rules.
Some examples
Gearbox Protocol provides credit accounts for leveraged yield farming and strategies, incorporating liquidation protection and isolated risk layers within each account.
Dolomite offers a money market with structured lending features and customizable risk parameters to limit excessive exposure.
Toros Finance offers leveraged tokens with embedded stop-loss logic and recovery mechanisms that cap losses without manual intervention.
This integration approach draws from structured finance, embedding safeguards directly into the tool itself.
It reduces friction for users seeking protection by eliminating the need to purchase separate policies, and enables the protocol to handle routine product-level risks more efficiently than broad mutual aid models.
Conclusion
In reality, the development of on-chain risk protection economics still lags far behind the speed of attacks.
The gap is significant, but these discussions are worth having. For on-chain insurance to grow, the industry needs to move beyond its obsession with total value locked (TVL) and instead focus on calls for a more important metric: total insured value.
Currently, less than 2% of the total value locked in DeFi is clearly insured. To reignite trust in DeFi, TVC is a key metric to watch—and the gap between locked value and insured value represents a significant opportunity for anyone who can adequately address the crypto insurance crisis.
Article by blocmates; Translated by AididiaoJP, Foresight News