Quantstamp launches Chainproof, promising trustworthy DeFi insurance

Decentralized finance (DeFi), which creates financial instruments using smart contracts on blockchain technology, has become a market of more than $75 billion, increasing thousand-fold in the past two years. 

With that rapid growth comes a lot of risk. Chainproof, a new company, has just launched to address the risks in DeFi with smart contract insurance products. Quantstamp, a smart contract testing company, incubated the new insurtech with backing from Munich Re and SOMPO Light Vortex. 

Munich Re views its investment in Quantstamp and Chainproof as a means to gain an edge in DeFi, according to Andre Knoerchen, head of new tech underwriting at the firm. “This technology is potentially very transformative, if not disruptive for the future financial industry, in our opinion,” he says. “Based on its own in-depth know-how and now in cooperation with Quantstamp and Chainproof, Munich Re will be able to assess opportunities and risks in the DeFi area even better in the future and further use the insights to develop its own role in this market.”

In 2019, before the DeFi market began its exponential growth, investors were reluctant to participate because they could not find a way to underwrite the risk, according to Sebastian Banescu, CEO of Chainproof and head of Quantstamp Germany. Smart contract insurance for DeFi, with supervision by a regulatory authority, could make DeFi more palatable to established investment firms, he added. Chainproof is based in Bermuda and regulated by the Bermuda Monetary Authority, which supervises insurance companies. 

“They have insurance experts on staff, who guide us and tell us if something is not conforming to regulations,” says Banescu.

Chainproof’s regulated insurance contrasts with unregulated DeFi insurance offerings that are available, but not palatable or even possible for many established investors, Banescu explains. 

“Quanstamp saw this from customers in the 400 to 500 audits we’ve done to date,” he says. “Customers asked us where they could buy insurance for the smart contracts. This is our way of fulfilling that need. Some of our customers are not legally allowed to buy unregulated insurance.”

Unregulated insurance for cryptocurrency allows liquidity providers to pool their funds to provide a means to address claims. “But the problem is that everyone, anyone in the world can pool together,” Banescu says. “The problem for institutions is they cannot pool together with everyone. They cannot pool together with terrorists, oligarchs or basically malicious entities.”

Chainproof coverage is strictly for hacking of DeFi smart contracts. It does not insure for losses of value. While policies note the price of the cryptocurrency at certain times, payment of any claims is in U.S. dollars, with certain ceilings, according to Banescu.

“If it happens that the cryptocurrency has appreciated a lot, there's a ceiling that we don't go over,” he says. “So we're not at all affected by market conditions.”