The art world has witnessed a dramatic shift to the virtual space in the past few years, accelerated by the Covid-19 lockdowns. With millions of dollars changing hands and the ever-present threat of hackings, insurance protocols for the Non-Fungible Token (NFT) market may become a necessity in the near future.
What started with CryptoKitties and CryptoPunks in 2017 has now become a legitimate multimillion dollar industry, with heavy hitters such as Christie’s and Sotheby’s embracing NFT sales and marketplaces like Nifty Gateway, OpenSea, Rarible, and Mintable, attracting considerable attention. The range of art projects for sale as NFTs is broad, from digital images for a few dollars, to artworks such as Everydays: The First 5000 Days, sold for $69million in March 2021.
The current state of DeFi insurance
The total value locked (TVL) for DeFi as a whole is over $100bn, while the DeFi insurance sector’s total market cap currently sits at under $2bn, with several key players dominating the market. To compare, one memecoin such as Doge, with extreme price volatility and questionable use cases, had at one point a market cap in the tens of billions.
Meanwhile an average $100m of assets are lost globally in DeFi each week, yet 98% of assets are left uninsured. Hacks cost the crypto community over a billion dollars in 2021 alone. With a huge influx of retail investors coming into the space on an ongoing basis, and various projects and protocols hacked across 2021, the need for crypto insurance has become ever more pressing and it’s clear the insurance side of DeFi is drastically undervalued.
While it could be said that many crypto investors are less risk averse than those in traditional financial sectors, many players have now made significant enough gains that they see insurance as not just an option, but an essential part of their investing strategy. There are clear signs of an increase in demand for stablecoin de-peg cover, which provides protection in the event of a stablecoin like USDT moving significantly below its pegged price, as well as for smart contract cover.
The collapse of Terra coin in May 2022 highlighted how fragile the crypto world and its associated products can be. With no safety net, Terra investors were left severely out of pocket when the coin crashed 99.9% in the space of a few days. Similarly, the CreamdotFinance hack in August 2021, which cost investors $130m, showed the weakness of digital assets. Options are increasing, with insurers currently branching out to building on different Blockchain networks including Avalanche, Binance Smart Chain and Polygon.
With all these DeFi insurance options expanding, it seems inevitable that soon there will be demand for NFT insurance options. The challenge of conflicting regulations in different jurisdictions arises, as well as how to ensure coverage can be applied cross-border to lost, stolen or corrupted artworks. There remain various questions to be answered but it looks like this could be a growth niche in the coming years.
