Decentralized Finance has changed the total concept of traditional financing. The key tools of traditional finance have been eliminated by the defi concept. The work of banks and insurance companies is reduced due to automation in defi. The stalls in the form of a bank and insurance company are fully traditional concepts like traditional stationary stalls compared with online and virtual marketplaces.
In the online marketplace, anyone from anywhere can buy and sell but the traditional stall system has to be open at a specific time of selling with a limited capacity of stock. A similar problem is associated with traditional finance along with the need for middle parties. Insurance plays a crucial role in mitigating risks associated with smart contract vulnerabilities. Let's check the requirement of insurance in decentralized finance to secure smart contract automation.
DeFi insurance is nothing but a financial product that provides coverage against financial losses incurred due to unforeseen events or risks within a decentralized finance system. There are a lot of risks associated with decentralized finance. These risks include smart contract exploits, hacks, bugs, system failures, etc. The rise of such a fault may lead to the loss of the user's funds for those who are using the decentralized finance network.
The basic objective of DeFi insurance is to protect users' assets and provide them with financial compensation in the event of a covered loss. It is not like traditional insurance or the insurance coverage of centralized finance. In the traditional system, the insurance coverage is provided by the central authorities but here the system is not only decentralised but the insurance coverage is also run by the blockchain network in a decentralized manner. Insurance is also automatic and run by smart contracts.
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VEIGO (Community Mod)
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