The brutal truth revealed! The huge pit of DeFi insurance: premiums eat up your profits, hackers can wipe everything out instantly, are your assets still exposed without protection?

Many people in the market say that insurance is a scam; this sounds harsh, but there is factual support. US-based Cigna Insurance has developed an algorithm that denies claims without reviewing medical records; UnitedHealth Insurance stops paying for care immediately once the algorithm-set time is up, and doctors' opinions carry no weight. The套路 of traditional insurance has always been clear: collect money first, intercept large commissions, then set up layers of hurdles to obstruct claims.

Although bank deposits are protected by the Federal Deposit Insurance Corporation (FDIC), the payout limit is only $250k, a standard set in 1934 that has hardly changed since. Brokerage accounts are protected by the Securities Investor Protection Corporation (SIPC), with a limit of $500k; once account assets exceed this amount, protection is effectively meaningless. Everyone assumes the protection is solid, but in reality, the payout cap is entirely set unilaterally by the insurance companies.

DeFi insurance originally had the opportunity to solve this pain point—eliminating intermediaries, with smart contracts triggering automatic payouts, completely removing the space for malicious denial of claims. But in reality, almost no one is willing to buy. Premiums significantly erode investment returns; after deducting premiums, the remaining gains simply cannot match the investment risks users undertake.

Nexus Mutual is currently the largest DeFi insurance provider. Since launching in 2019, its total claims paid out have only reached about $250k. In April 2026, Kelp DAO was hacked, losing up to $292 million. This single theft amount is 16 times the total claims paid by this leading insurance provider over seven years. Traditional insurance aggressively denies claims, while DeFi insurance has slim premium income; the root cause is that almost no investors are willing to insure.

The stability of traditional insurance relies on the fact that risks are not correlated. A house fire does not cause damage to other residents. An insurance company can sell policies to 1 million users, and a single fire claim can be covered by the entire premium pool. But DeFi lacks this risk isolation—oracle failures, cross-chain bridge vulnerabilities, and other security incidents can cause chain reactions, impacting all funds pools and lending protocols built on the underlying assets.

In March 2023, the $USDC de-pegging event caused all protocols using $USDC as collateral to suffer on the same day. For DeFi insurance pools, risks are highly correlated; underwriters can only bet that losses from security incidents are controllable, and that the insurance pool’s funds are sufficient to cover them. In March 2023, Euler Finance was hacked for $197 million, and chain risks quickly spread: Angle Protocol suffered a $17 million loss holding Euler liquidity tokens, Yield Protocol shut down operations urgently, and other platforms like Inverse Finance were affected. Once a protocol has a security breach, it can trigger multiple projects, and extreme incidents in a single day can even deplete the entire insurance reserve.

Looking at Nexus Mutual and InsurAce’s current premium rates, compared to their native annualized yields: $Aave V3’s $USDC deposits yield about 3.14% annually, with premiums ranging from 1.5% to 2.5%, leaving a net yield of only 0.6%–1.6% after premiums. Investors take on on-chain security risks, but their final returns are only slightly higher than ordinary bank savings. Morpho, Compound, Spark have similar yields, with native annualized returns of 3.5%–4%, but premiums eat up one-third to half of the gains, resulting in slim profits and extremely low cost-effectiveness.

Maple Finance’s institutional lending pools offer annual yields of 4.77%–4.90%, yet insurance premiums are as high as 3%–6%, making net returns range from -1.1% to 1.9%. Ethena staking yields 3.6%–4%, with premiums also at 3%–6%, resulting in net returns from -2.4% to 1%. Buying insurance on these platforms can even lead to principal losses in extreme cases. Only the original MakerDAO (Sky) performs well, with a savings product yielding 3.6% annually and the lowest insurance premium at just 0.11%, widely regarded as the lowest-risk DeFi asset, maintaining net returns of 2.8%–3.5%, with most gains retained.

Premium pricing strictly corresponds to risk levels, but emerging platforms charge excessively high premiums, directly consuming the high returns users seek. Crypto investors choosing to forego insurance are not lazy or reckless—they understand that in most cases, buying insurance results in zero returns. Even if all DeFi depositors tomorrow chose to insure fully, the entire industry would be unable to support it: Nexus Mutual’s total fund pool is about $81.56 million, with a maximum effective coverage of only a few hundred million dollars across the industry, while major protocols lock assets worth hundreds of billions. The supply-demand gap is enormous. In the event of a large-scale security incident like Kelp DAO, a single claim could drain most of the industry’s insurance reserves.

The $18 million in total historical claims precisely exposes the fragility of the industry’s fund pools— the entire market has never experienced a catastrophic risk event capable of breaching the underwriting reserves. After users submit claims to Nexus Mutual, a vote by all token-holding members determines whether to pay. If the vote supports the claim but the payout ultimately fails, the assets of the voting members will be directly harmed. This mechanism naturally fosters denial tendencies. Traditional insurance employs underwriters and claims adjusters to balance these conflicts, but DeFi insurance combines all rights and responsibilities within the same group.

Before the 2008 financial crisis, risk pricing agencies generally believed that a U.S. housing market collapse was impossible, as they had never experienced it firsthand. AIG, the insurance giant, sold large-scale risk protection contracts, but when the crisis hit, it was unable to fulfill its obligations. Before the FDIC was introduced, ordinary depositors had no safety net for their assets. The Great Depression forced the government to mandate bank insurance, making it a hard cost of banking operations. In DeFi, no one can force protocols like Aave or Morpho to buy insurance; deploying smart contracts is permissionless, and no entity can compel projects to allocate risk coverage. The industry lacks a mechanism to withstand extreme market conditions.

Nexus Mutual’s three largest claims are: approximately $7.3 million paid in two installments for the FTX collapse, $5 million paid for the TribeDAO hack, and $3.4 million paid for the Euler Finance hack. The total of these three claims nearly equals the $18.6 million in claims accumulated over seven years. Now, this mutual insurance platform is shifting toward proactive risk prevention, partnering with security audit firms like Immunefi, Cantina, and Sherlock to launch bug bounty insurance products. Protocols only need to cover 20% of critical bug bounties, with the rest backed by Nexus Mutual, incentivizing white-hat hackers to find vulnerabilities early and prevent thefts from the source.

At the same time, Nexus Mutual is developing compliant insurance sub-pools, attempting to connect crypto risks with reinsurance pools and bring in larger external capital to supplement underwriting capacity. In March 2025, Cantina further launched an independent native protocol insurance product, allowing users to receive claims even if vulnerabilities are not discovered by bounty hunters before an attack. Both of these initiatives fundamentally acknowledge a core reality: on-chain funds are insufficient to cover on-chain risks.

The three major flaws—small pool size, highly correlated risks, and the same group acting as both claims adjudicators and capital providers—cannot be eliminated. Nexus Mutual’s locked assets, according to DeFiLlama, total about $81.56 million, accounting for 85% of the entire DeFi insurance market. Other competitors are shrinking: InsurAce’s peak locked assets reached $150 million but now only have $13,200; after UST de-pegged in 2022, it only paid out one major claim; Sherlock’s fund pool shrank from $60 million to $505k within a year; Unslashed Finance’s millions of dollars are stuck in outdated code that stopped updating at the end of 2024. Other insurance projects have either shut down completely or shifted their business focus.

Lighthouses warn ships of reefs but cannot charge passing vessels for their use, making it difficult for anyone to voluntarily fund their construction. The benefits are shared by all, but the costs are borne solely by the builders. The value of DeFi insurance lies precisely in preventing chain reactions of liquidations and crises. Crypto assets are highly interconnected; only if everyone insures simultaneously can the overall market remain stable. But if everyone relies on others to insure and is unwilling to pay premiums themselves, no one will buy insurance, and the risk protection system becomes a hollow shell. Without proactive backing, no assets can be truly protected.