When the algorithmic stablecoin Terra $UST was de-fixed in May 2022, many feared that the crash would lead to a systemic collapse of the entire cryptocurrency industry. Dan Thomson, Chief Marketing Officer of leading DeFi platform InsurAce, shares how their swift insurance payouts to over 155 victims who lost funds in the crash helped maintain investor confidence in DeFi at such a critical time.
On May 6, 2022, news broke in mainstream crypto channels that the algorithmic stablecoin Terra-$UST had lost its connection, leading to widespread investor panic. And in 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 maintain a fixed price of $1, fell below 35 cents on May 9. the sister token, $LUNA, which was supposed to stabilize the price of $UST, fell from $80 to almost zero.
No, thanks to this catastrophic collapse of the Terra ecosystem, thousands of investors scattered around the world lost over $40 billion — therefore, the world of DeFi was threatening to collapse until Stablecoin De-Peg Covers came to the rescue.
What is Stablecoin Insurance?
Stablecoins are special digital assets that play the traditional role of money in the blockchain world. They are cryptocurrencies whose value is 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 backup mechanism to back up their tokens. Asset-backed stablecoins are more stable, they are often highly 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 over-collateralized, there is a high risk of unbinding in adverse market conditions.
To mitigate these risks, DeFi protocols have created Stablecoin Defix Caps to protect stablecoin users and investors from certain defix events.
InsurAce was one of the DeFi protocols that made the most impactful responses to the recent high-profile stablecoin de-fixing that occurred in the Terra ecosystem.
During a recent interview, InsurAce CMO Dan Thomson revealed how the timely intervention of the DeFi protocol helped save the day.
“The main reason our response was effective was because of how timely and efficient it was,” Thomson said.
“On May 13th, barely 48 hours after the $UST de-pegging event, we released a press statement to set in motion the loss claims process for $UST investors. We have published a user guide that provides clarity on coverage specifications and claim eligibility. With a 7-day window for claims, we made it our goal to provide immediate support to victims and send a reassuring statement to the rest of the DeFi world.” he added.
How InsurAce Responds to the $UST Crash
With a streamlined claims process, InsurAce has received global praise for providing timely intervention for $UST investors who have hedged their $UST stablecoins with InsurAce. InsurAce’s quick response helped restore investor confidence in DeFi as users quickly recovered in the midst of a terrible market-wide downturn.
Total covers sold: 234
Total amount covered: $22,158,820
Total claims: 173
Total claim amount (USD): $12,474,477.84
Total number of rejected claims: 18
Total value deducted from Luna Drop (USD): $177,692
Total claim amount after deductions (USD): $11,730,758.24
InsurAce — Summary of $UST De-Fix Payouts
More importantly, a thorough review of the chain’s claims data showed that InsurAce took a significant hit in the process. According to an updated report released by the Protocol Advisory Board, the protocol has estimated ~$11.7 million in USUST unpin requests. Having collected only $94,000 in premium payments, such a high margin rate of successful claim payouts showed that the platform had implemented remarkable risk management strategies prior to the crystallization of De-peg risk.
When asked about how the payout decision-making process works, Thomson explained that InsurAce has deployed a community-driven approach, with its independent management token holders ($INSUR.) running the claims evaluation process.
“The decentralized voting was conducted by the community of InsurAce claims assessors who hold and stake $INSUR tokens. And at the end of the voting process, they approved a total of 155 fixed coverage requests for $UST and 18 were rejected as ineligible according to Stablecoin fixed coverage terms and conditions.” Thomson continued.
Compensation for investors and stakers in the ecosystem
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 the losses of protocol underwriters whose assets are were used as part of the $UST payouts.
“In addition to improving our risk management strategies, we have put in place some plans to mitigate the losses incurred by bettors. Over the next 12 months, a fixed amount will be paid into an on-chain pool from which bettors can withdraw their compensations. A phased approach will help us ensure that we can help players recoup some of their losses while maintaining stable liquidity in the InsurAce protocol,” Thomson concluded.
The $UST crash remains one of the biggest tests for DeFi overall, mitigated in part by safety nets of protocols and underwriters working hard to protect the space. With the presence and continued efforts of protocols like InsurAce to protect users in the space, DeFi is rapidly evolving into an increasingly safe, stable and sustainable global alternative to traditional finance where people have more control and autonomy over their finances.
InsurAce.io is a leading decentralized multi-chain protocol that provides reliable, stable and secure risk protection services to DeFi users, enabling them to protect their investment funds against various risks.
With InsurAce.io, users can count on:
- Premiums with unbeatable low coverage
- Cross chain coverage
- Multi-threaded availability
- Sustainable return on investment (via our investment portal and mining program)
Since its debut in April 2021, InsurAce.io has built a full-spectrum cross-chain product line that spans 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, Moonbeam, Bifrost, Aurora and Optimism. InsurAce.io currently has active 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.