Polkadot-based Tidal Finance has closed a $1.95 million seed and strategic funding for its cross-chain suite of decentralized insurance services, the company announced Wednesday.
The round was 4x oversubscribed due to investors’ interest in the insurance space. Included in the round were KR1, Hypersphere Capital, QCP Capital, AU21 Capital, NGC ventures, and Kenetic Capital.
More than $100 million has been lost through smart contract hacks so far in 2020, including recent attacks on Pickle Finance and Harvest Finance, and the market for insurance for smart contract hacks is ripe for disruption.
The total covered asset under in Nexus Mutual contract is currently around $60 million, only 0.3% of the approximate $16 Billion Total Value Locked in DeFi. As a result, an enormous opportunity remains in the provision of insurance products for the remaining billions in uncovered assets.
In our research and analysis, we noticed several main problems that permeate the current market and result in mismatched supply and demand for DeFi insurance coverage products.
1. The locked up pool of insurance reserve capital is underutilized, and the long-term return on capital is low, which fails to incentivize liquidity providers (LPs) to deposit capital into the reserve capital pool, especially compared to other more lucrative DeFi yield farming products.
To raise the return on these depository instruments, insurance providers have introduced token rewards, which lacks long-term economic viability. Without the implementation of token rewards to artificially boost yield, insurance products struggle to reach a 1% APY from contract premiums.
2. As a byproduct of the low efficiency of insurance capital, liquidity providers raise insurance costs to increase the returns on their capital. As a result, the cover buyer must pay a higher rate for the insurance of their covered protocols than the underlying products themselves yield.
At TIDAL Protocol, we believe in maximizing capital utilization and returns, and thus leverage must be increased by offering bundled insurance protocols with low correlation to increase the cover supply, at the same time controlling the risk of insolvency through multiple levels of reserves and other risk mitigation practices. TIDAL Platform plans to offer highly competitive insurance premiums by allowing LP’s capital to get exposure to multiple protocols – driving down the price of each protocol’s premium while increasing the returns of LP’s capital.
TIDAL picked the Polkadot ecosystem for long-term growth for a couple of main reasons. One is associated with gas fees.
Ideally, the insurance marketplace should support frequent transactions on a daily or even hourly basis, which requires a low gas fee supporting network. Secondly, the Polkadot network is interoperable with other chains, supporting ethereum and other ecosystem user cases. In the long run, it would bring a bigger addressable market for the TIDAL platform.
“Users of DeFi protocols must feel more comfortable with putting increased assets at risk through various factors, one being covered,” said co-founder Chad Liu. “We believe that an open, decentralized cross-chain insurance platform can address this issue.”
“Decentralised finance has some key pillars on which it functions and Tidal is the perfect mix of these elements. It will provide customizable cover for many of the core financial contracts, essential to building the trust and hence the growth of a new and evolving ecosystem. At the same time, it’s also building in the core tenets of ‘Defi’ with its focus of community participation, governance, and sharing in the success of the platform. We’re very excited to be involved at this early stage,” said George McDonaugh, Managing Director and Co-Founder of KR1,