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Major Conundrums and Possible Solutions in DeFi Insurance

Author

Listed:
  • Zhou, Peng

    (Cardiff Business School)

  • Zhang, Ying

    (University of Surrey)

Abstract

This paper empirically explores the early development of insurance projects in the decentralized finance (DeFi) industry, which is based on disruptive technologies like blockchain and smart contracts. A brief history of DeFi is narrated, stressing four risks of DeFi (volatility risk, cyberattack risk, liquidity risk, and regulation risk) and its co-evolution with traditional finance. First-hand evidence is collected from informed industrial practitioners through two semi-structured focus group discussions. Consensuses are reached on why the DeFi insurance market is underdeveloped and incomplete (the liquidity conundrum, the actuarial conundrum, the verification conundrum, the scale conundrum, the yield conundrum, the exploitation conundrum, the cybersecurity conundrum, and the regulation conundrum) and how the next generation of DeFi insurance can address these conundrums. Further evidence is obtained to quantify the importance of conundrums using Analytic Hierarchy Process (AHP). Building on the qualitative and quantitative findings, a prototypical model of DeFi insurance is proposed.

Suggested Citation

  • Zhou, Peng & Zhang, Ying, 2025. "Major Conundrums and Possible Solutions in DeFi Insurance," Cardiff Economics Working Papers E2025/5, Cardiff University, Cardiff Business School, Economics Section.
    • Handle: RePEc:cdf:wpaper:2025/5
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    Cited by:

    1. Yin, Wei & Wu, Fan & Zhou, Peng & Kirkulak-Uludag, Berna, 2025. "Exploring resilience in the cryptocurrency market: Risk transmission and network robustness," International Review of Financial Analysis, Elsevier, vol. 106(C).

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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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