All financial innovations cannot escape those four words: when something goes wrong, who compensates. The crypto space in 2026 is being tightly gripped by this question.

Written by: Fu Gui

Weak Year

By mid-2026, the total market value of crypto has been fluctuating between 2.2 trillion and 2.3 trillion US dollars, just over half of last October's peak of 4.27 trillion dollars. The narrative hasn’t stopped. RWA has been shouting about the "institutionalization year" for a whole year, down nearly 7% over the year; meanwhile, the meme sector, which has little rationale to speak of, has increased more than twofold; Bitcoin itself has dropped nearly 30%. Interestingly, token prices and underlying data have completely decoupled this time — the on-chain scale of tokenized RWA has actually increased by 40% this year, surpassing 51 billion dollars. Unfortunately, the market is too lazy to price this simple fact of "growing scale"; it only recognizes the next tale that can be told for three months.

The stories are being told passionately, yet nobody is willing to bring up the old issues. In DeFi, the insurance coverage rate for assets lies below 2%. This segment has been operational since 2019, accumulating over 6.5 billion dollars in underwriting, but with historical payouts of only 18.5 million dollars. Just in April of this year, two security incidents involving Drift and Kelp DAO consumed over 600 million dollars, with most losses not covered by any policy. Some institutions have given an even more pessimistic estimate: there are actually 120 to 160 billion dollars in assets lying in DeFi, of which 95% to 98% are uninsured. These two sets of numbers clash, but the conclusion is consistent—this industry is more exposed than most are willing to admit.

No one is writing small essays for the insurance segment; no one is speculating on its airdrop expectations. It exists in a corner with no narrative, quietly working towards becoming the infrastructure it should be. This is itself quite ironic — the bigger the casino gets, the more it needs someone to manage the aftermath, but gamblers least want to hear "what if you lose."

Three Policies, Three Genes

To understand the temperament of the insurance business, one must go back and see how it was born.

At the end of the seventeenth century, in a café by the Thames. A guy named Edward Lloyd opened a place by the dock where captains, shipowners, and merchants gathered to drink coffee and talk shipping. As they drank and chatted, some began to bet on whether others' ships would return safely — "I bet yours won't return," "Then I bet I will definitely return." Seeing potential, Lloyd set up a podium in the café to announce shipping auction prices and initiated a "candle auction" — when the candle burned out, the bidding ended, and no one could dawdle. In 1773, this group formally established a committee, moved into the Royal Exchange, and renamed it "Lloyd's." Yes, it’s that Lloyd's of London, the world’s largest active insurance market. The original form of insurance was just an elegant betting game.

Earlier versions appeared

In 1347, in the Mediterranean. On October 23 of that year, the world's first marine insurance policy was born in Italy. Merchants had found the risks of Mediterranean navigation too great and thus invented "general average contribution": if a ship capsized, everyone would share the loss. The logic shifted from "betting you will lose" to "sharing the burden," which was significantly more civilized than at the betting table.

There is another origin, hidden in a more obscure corner.

In the infirmary of a medieval monastery. Nobles donated land to build hospitals, and monks cared for the elderly and the sick in the infirmary, weaving promises of food, accommodation, herbs, companionship, and prayer for the deceased into an early "pension-medical-funeral" guarantee. After the Industrial Revolution, workers transferred the same spirit into mutual aid society account books, paying fees, sharing burdens, and retiring, evolving into today's pensions and health insurance. This embodies the gene of charity, relying not on contracts, but on goodwill.

Three bloodlines (betting, sharing, charity) have not been severed. Going on-chain is merely changing vests to continue living — Nexus Mutual's kind of discretionary mutual is essentially sharing; Etherisc helps African farmers automatically compensate for drought losses based on weather data, fundamentally a form of inclusive charity; as for the high-yield insurance pools opened for newly launched, unaudited protocols, that is essentially the most direct descendant of Lloyd's betting spirit.

A Forgotten Prehistoric Case

In an era when the term smart contract had not yet been invented, when blockchain was still called "chain of blocks," someone in Europe had already experimented with virtual insurance.

At a real old insurance company, a few employees, out of fun, created a virtual property guarantee project. It was likely in games or early virtual communities, providing guarantees for players' virtual assets, compensating with game currency or equivalents in case of incidents. Looking at it now, it seems absurd — how do you insure something virtual? What is the legal effect of a policy? But they indeed made it happen. Later, this project gradually evolved into a small CEX trading BTC, surviving the Mt.Gox era. While many exchanges of the same era faded into oblivion, it continued operating even after being sold.

Reflecting on this story today reveals two layers of meaning.

The first layer: The insurance business is naturally related to trading. When you help people manage risks, you inadvertently create a fund pool; with a fund pool, you naturally match buyers and sellers, eventually turning into an exchange. Historically, Lloyd's transitioned from a coffee house to an insurance market, to some extent, reflects this logic.

The second layer: The demand for virtual asset insurance was acknowledged over a decade ago. Back then, "virtual" referred to game equipment and community points; today, it refers to DeFi protocols and on-chain assets. The demand remains unchanged; only the subjects have changed.

Who Needs, Who Provides

The demand side is not complex. Users deposit money into Aave, Curve, Lido, fearing protocol hacks; institutions entering the market fear private key issues, fear custodians running off; RWA issuers fear that underlying assets will default without coverage. Traditional insurance companies’ answers are consistently simple and blunt: we do not understand your risk model, we do not provide coverage. Therefore, this blank space can only be filled by insiders.

On the native on-chain side, Nexus Mutual remains the elder brother, using its identity as a discretionary mutual to take on smart contract vulnerabilities, stablecoin de-pegging, and node penalties. It still refuses to use the term "insurance" — buyers have no legally binding right to demand compensation; whether to compensate is decided through community token holder voting. This is a clever loophole, but it also buries a risk: when it paid out during the Yearn Finance hack in 2020, it did so gracefully, disbursing 2.7 million dollars in real cash; however, if any voting is deemed unfair, this trust system could quickly unravel.

InsurAce has taken a multi-chain route, automatically compensating for 11.8 million dollars in policies during the UST collapse using a parametric mechanism, without any manual claims verification or negotiation. This is precisely what is most alluring about parametric insurance — it’s not a judgment of "should we compensate," but a physical reaction of "automatic compensation triggered by conditions."

Etherisc focuses on parametric infrastructure, incorporating weather data into smart contracts to insure 17,000 farmers in Kenya against drought, allowing them to purchase insurance via their mobile phones, with immediate payouts in seconds when drought strikes, without waiting for insurance companies to send someone to assess damages. This is far more romantic than DeFi hacker insurance — it is helping those whom traditional insurance scorns to serve.

The institutional side has a completely different style, with larger sums and more traditional posturing. Multiple syndicates under Lloyd's, such as Arch, Atrium, Beazley, and Canopius, have started underwriting crypto risks. Evertas is the only crypto insurance coverholder recognized by Lloyd's, underwriting through Arch with a maximum payout of 360 million dollars. Gemini secured 125 million dollars in digital asset insurance, BitGo obtained 250 million dollars through Lloyd's, and Bitstamp received 300 million dollars. Marsh has established a custodial insurance facility worth 825 million dollars. Aon has gone further, partnering with Canopius to create a cold storage facility, with single client limits reaching up to 625 million dollars, having already rolled out over 1.2 billion dollars in coverage worldwide.

These figures may seem intimidating. But placed against the open exposure of 80 to 160 billion dollars in DeFi, it amounts to a drop in the bucket. More critically, institutional insurance covers custodial failures and cold wallet thefts; it does not protect against retail investors being hacked in DeFi protocols — that is another game on a different board.

Why No One Is Buying

The greatest enemy of on-chain insurance is not hackers, nor regulations, but human nature.

What type of people are DeFi players? They are individuals who can bear a hundredfold volatility, treating "going to zero" as a topic for conversation. This group, by nature, has a risk appetite fundamentally opposed to insurance — insurance is sold to risk-averse parties, while the crypto world is weeding out the risk-averse. People come here to seek a hundredfold returns, not to spend 2% on a premium to保本. This explains the paltry 2% coverage rate: it’s not that the product is poor, it’s that users simply do not want to buy.

Another harsher reality is that the current on-chain policies mostly only cover smart contract vulnerabilities. What are the major losses retail investors face on-chain? It’s private key leaks, phishing links, handing their mnemonic phrases to scammers posing as customer service. None of these issues are covered by the existing products. It’s not that they don’t want to compensate; it’s that they cannot afford to — this kind of risk cannot be actuarially assessed; scams are evolving daily, and the conditions for compensation cannot be codified.

Moreover, there is another layer: the American healthcare insurance industry has provided a vivid lesson to the world. UnitedHealthcare, the largest healthcare insurance company in the U.S., serves 49 million Americans, generating revenues of 281 billion dollars in the fiscal year 2023. Under CEO Brian Thompson, profits surged from 12 billion dollars in 2021 to 16 billion dollars in 2023. But where does this money come from? The denial rate is as high as 32%, double the industry average of 16%. In 2023, a class action lawsuit accused them of using AI to "replace real medical professionals" and unjustly denying care to elderly patients; over 90% of denial decisions were overturned in internal appeals or federal administrative judge proceedings — in other words, the company knows it's wrong to deny, yet they deny first, knowing that most people won't appeal, and thus they profit.

In December last year, Thompson was shot dead outside a Hilton hotel in Midtown Manhattan. The bullet casings bore three words:

“delay” (拖延), “deny” (拒绝), “depose” (废黜).

These three words correspond exactly to the insurance industry's infamous "3D denial tactic." UnitedHealthcare's parent company issued a solemn statement on Facebook, disabling comments, but over 100,000 users clicked the "laugh" emoji. Polls show that 53% of respondents considered the shooter a "villain," but 10% viewed him as a "hero," with younger voters and progressives more likely to sympathize with the shooter. Some doctors said the suffering and loss of lives caused by Thompson as CEO "reach the magnitude of millions of people."

What is the relationship between this incident and on-chain insurance? It is significant. It exposes how deeply the term "insurance" has eroded in public trust. Decentralized insurance claims to solve trust issues—no need to trust companies, just trust the code. But code also has backdoors (who controls the oracles? Who designs the claim conditions?), and DAO votes can also be manipulated by large token holders. On-chain insurance must prove it is not just a blockchain version of "3D denial"; this proof is still incomplete.

Structure and Ledger

The funding logic of on-chain insurance is entirely different from the traditional insurance companies' model of relying on capital plus premiums; it resembles a "peer-to-pool" approach.

Users pay premiums for coverage, while capital providers stake money into specific protocols' risk pools. Threefold revenue comes in — premium shares, token rewards, and idle funds invested back into on-chain U.S. Treasury or Aave to earn interest. In case of incidents, the staked principal is directly drawn by smart contracts to compensate the victim. You are not buying insurance; you are becoming a shareholder of an insurance company, also moonlighting as a compensation referee.

This design has a subtlety overlooked by most: it solves the deadlock of "conflicts of interest between shareholders and policyholders" inherent in traditional insurance companies. The profit of traditional insurance companies is the money they deny in claims. Raising the denial rate by one percent makes profits look better. Thus, UnitedHealthcare has a natural incentive to squeeze claim payouts. However, in Nexus Mutual's model, the voters on claims are also the underwriters — overpaying means losing their principal; underpaying means trust collapses, the pool becomes unused, and they have no premiums to earn. In theory, it internalizes the conflict of interest into a balance. But this is only theoretical — the risk that community voting can be manipulated by large token holders cannot be eliminated by simply writing a white paper.

Let’s take two examples. Low-risk pools staked in top-tier protocols like Aave and Uniswap yield about 3% to 7% annually, with most earnings derived from investing idle funds into on-chain U.S. Treasuries; premiums are just a small portion, stable but not stimulating. In contrast, newly launched, unaudited insurance pools can label yields as high as 15% to 35%, appearing enticing, but the trade-off is a maximum drawdown of 100% — if this protocol gets hacked and compensation voting is approved, the staked principal will be directly wiped out. Similar to selling options, most months yield some meager profits, but betting wrong once obliterates the interest and even incurs principal loss. The historical loss rate appears distressingly low on paper, which is exactly the classic depiction of tail risk: it looks decent during calm times, but when black swans arrive, the fund pool collapses.

Another aspect that is hard to grasp: buying insurance can be done anonymously, but claims often require KYC. The rule is simple — before compensating money, first confirm that you are not the money-laundering individual. It sounds reasonable, but upon reflection, it is contradictory: a decentralized mutual organization, often flaunting "no trust" principles, suddenly demands your ID when it comes to compensation. This is not just self-defeating; it is reality’s anti-money laundering hammer forcing them to rise to their feet.

Globally Different Paths

There is ongoing debate worldwide about whether decentralized insurance can work.

China has taken a completely different route — directly using consortium chains while prohibiting anonymous tokens. In 2019, the "Regulations on the Management of Blockchain Information Services" were implemented, requiring all blockchain projects to be filed and controllable. In 2021, a notification from central banks and other ministries cut off the compliance channel for virtual currency trading, requiring industry self-regulatory organizations to prevent member units from providing services related to virtual currencies. That same year, the insurance risk control blockchain platform officially launched, with 14 insurance companies including PICC, Taikang, and Ping An joining, promoting data sharing starting from travel insurance fraud prevention.

In simple terms: While blockchain technology can be utilized, it must operate under regulated, traceable consortium chains; purely decentralized, anonymous tokenized insurance models are fundamentally unfeasible in China.

This approach differs from those in the U.S., Europe, and Dubai. It does not pursue "decentralization of trust," but instead uses blockchain to enhance regulatory transparency — each insurance company places risk data on-chain for cross-verification to prevent fraud and duplicate claims. This stands in stark contrast to Nexus Mutual: one operates a community voting mutual on a public chain, while the other promotes data sharing fraud prevention on a consortium chain. It is too early to judge whose path may extend further. However, the Chinese market has at least answered another side of the same question — regarding "who compensates when something goes wrong," the regulatory view is "licensed institutions compensate according to rules," not "DAO voting decides what to do."

The License Hurdle

One thing needs to be said upfront: the insurance industry globally is typically subject to harsher regulatory scrutiny than banks. Capital adequacy, solvency, reserve calculations — all sorts of regulations are far stricter than lending — the financing costs in this industry can sometimes be lower than in banking, but it involves a broader societal impact, therefore regulations are correspondingly more severe.

Fast forward to 2026, this hurdle has become more tangible. Just half a month ago, the transition period for the EU's MiCA officially cleared on July 1; failing to obtain CASP authorization means it is illegal for VASP to operate within the EU from this date. The French AMF has already clearly reminded that there is no flexibility regarding this deadline. Currently, there are only about 130 to 140 CASP licenses issued across the EU, and fines exceeding 540 million euros have already been issued. Interestingly, MiCA distinctly excludes insurance products from its regulatory scope; completely decentralized and minimally-intermediated DeFi protocols are similarly exempt — if on-chain insurance is sufficiently decentralized, it happens to fall through the regulatory cracks. Unable to reach it, but also unable to obtain the legitimacy endorsement that comes with a license, it finds itself stuck.

In Asia, a different path is being taken, without beating around the bush, directly mandating insurance as a must-answer question. The Hong Kong Securities and Futures Commission requires licensed VATPs to have 100% insurance coverage for hot wallet assets and at least 50% for cold wallet assets, with the hot-to-cold ratio strictly controlled at 98% to 2%. Dubai's VARA similarly mandates that hot wallet exposures require compulsory insurance, along with a liquidity asset test.

The situation in the U.S. remains unchanged, with the SEC, CFTC, state insurance regulators, and FinCEN each responsible for different segments, none of whom have thoroughly managed the crypto insurance area.

Nexus Mutual still steadfastly avoids using the word insurance, calling itself a discretionary mutual, offering "no 100% legal guarantee of payout," but rather "community votes to decide whether to compensate." This is a clever loophole that sidesteps the three core obligations corresponding to licensing regulation—statutory solvency, mandatory reserves, and legal rights to claim. However, it also simultaneously relinquishes the most critical promise of insurance: that when something goes wrong, someone is guaranteed to compensate.

The Remaining Gaps

Let’s look at the numbers. The global blockchain insurance market is projected to reach 930 million dollars in 2025, 1.3 billion dollars in 2026, and is expected to soar to nearly 7 billion dollars by 2031, with a compound annual growth rate of nearly 40%. The more narrowly defined decentralized insurance market is estimated at 3.5 billion dollars in 2025, expected to rise to almost 17 billion dollars by 2029. These figures sound impressive, but when placed against the backdrop of the traditional insurance industry’s approximate 83 trillion dollar scale in 2026, they remain a negligible fraction.

Looking ahead, the first area likely to be filled is institutional custody insurance — regulation has shifted this from an optional to a mandatory question, with the licensing issuance in Hong Kong and Dubai continuously generating real premium demands. Secondly, RWA insurance will be necessary as on-chain assets continue to grow; there must be a credit enhancement mechanism in place, and insurance will likely fill this role. Further down the line, as AI agents begin to independently manage on-chain funds at scale, liability insurance will likely emerge as the next new type of insurance — who will compensate for AI decision-making errors will be an unavoidable question.

However, the hardest gap to fill is not technical or capital, but rather trust. The insurance industry fundamentally sells trust. If you sell a policy to a gambler, their first question isn’t "what's the premium," but "why should I trust you to pay?" On-chain insurance can use code to address the efficiency issues of automatic compensation, can employ DAO governance to resolve conflicts of interest, and can utilize parametric solutions to tackle claims costs. But the most primal question — "why should I trust you" — remains the ultimate unresolved query left by all on-chain protocols.

Following the assassination of UnitedHealthcare's CEO, a highly upvoted comment on social media read: "They have killed hundreds of millions, only using paper and algorithms." Once insurance loses its credibility, it is no longer a guarantee; it becomes another form of plunder.

Whether decentralized insurance can reclaim the trust trampled by traditional insurance remains to be sufficiently evidenced. However, one thing is certain: the old captains of betting ships in that café likely never imagined that three hundred years later, the same set of betting tricks would be used to insure the wallets of AI agents. They also never envisioned that actuaries sitting in London’s office buildings would someday be compelled by a group of smart contract programmers to once again answer that most fundamental question — when something goes wrong, who compensates?

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