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BlockFi becomes the latest casualty in the fallout of FTX as it files Chapter 11 of the U.S. Bankruptcy Code. Elsewhere, Compound votes to reduce the maximum borrowable amount across ten markets.
Today, we examine the price action of different layer-1 and related tokens while our Research team dives into the state of crypto insurance.
This is the Delphi Daily. Let’s dive in.
🚨 In Case You Missed It
- BlockFi begins restructuring and files voluntary cases under Chapter 11 of the U.S. Bankruptcy Code.
- Silvergate Capital says that it has minimal exposure to BlockFi with less than $20M of total deposits from the company.
- Compound Finance votes to reduce the maximum borrowable amount across ten markets to prevent insolvency risks.
- MakerDAO votes against CoinShare’s proposal to invest $100-500M in corporate debt securities and government-backed bonds.
- The United States House committee sets Dec. 13 as the date for the FTX hearing.
📊 MATIC and BNB Outperform in the Wake of FTX Fallout
- The sudden collapse of FTX has spurred significant price action among layer-1 and related tokens. Notably, only MATIC and BNB have seen an increase in price since the beginning of October.
- While MATIC is up 6% over that time frame, BNB is up only 3%. Many related tokens have seen a decrease in price since then. While SOL is down -60% over that time frame, NEAR is down by -55%.
- MATIC outperformed the group even before the FTX collapse and this trend has continued since then. MATIC also had the largest post-collapse price bounce, with a 41% increase off its lows.
- BNB, the other outperformer, has made notable gains in the past week. On Nov. 19, BNB was down -10% since the beginning of October but has since rallied up to 5% in the same time frame.
- The underperformance of SOL is largely due to the significant investments held by FTX and Alameda in the ecosystem. FTX also participated in a $350M fundraising round for NEAR in April 2022.
⚡ The Current State of Crypto Insurance
- As DeFi protocols have gained traction and seen increasing deposits to smart contracts, lucrative opportunities for hackers and exploiters have been created.
- Hackers spot flaws within protocol architecture and find ways to extract value from these faults. In 2022 alone, $2.7B worth of funds were lost to hacks, representing a 63% increase from last year.
- Audits and code reviews can help safeguard against exploits and are an obvious first step, but they do not remove all of the risks associated with exploits.
- Insurance protocols provide coverage on select DeFi protocols and insure certain risks. There are two main types of coverage that insurance protocols offer: smart contract vulnerabilities and depeg risk.
- Smart contract vulnerability insurance covers the underlying smart contracts of the protocols. In the event of a smart contract exploit or hack that results in the loss of user funds, insurance will allow for a claim for the covered amount.
- Depeg risk insurance covers stablecoins. In the event of a depeg to a certain degree, it will allow for a claim for the covered amount.
- There are two main participants for crypto insurance, the coverage purchaser, such as a DeFi user, and the coverage issuer, such as the insurance protocol.
- The coverage purchaser deposits funds into a DeFi protocol to earn yield. To remove their risk of smart contract exploits, the user goes to an insurance protocol and purchases coverage for the DeFi protocol.
- A small premium is paid, but when an exploit happens, the user can file a claim with relevant evidence. Once approved, the user is paid the covered amount.
- An insurance protocol offers coverage for select protocols or stablecoins. Unlike traditional insurance, where the counterparty is the insurance company, insurance protocols allow other users to underwrite deposits.
- The deposit underwriter acts as the counterparty and earns yields from premiums alongside token incentives. When an exploit occurs and a claim is filed, claim assessors will vote to approve or reject the claim. Anyone can become a claim assessor by staking the insurance protocol’s native token.
- Despite the growth of DeFi and the increase in protocol hacks, the crypto insurance sector has not seen much traction. At its peak, only 1.2% of all DeFi TVL was in insurance protocols. In recent months, this number has ranged between 0.7% and 1% of total TVL.
- Today, only $235M of TVL is in insurance protocols vs. $40.8B in the entire market. Even at a 200% cover ratio (total cover amount / TVL), it can only insure 1.15% of the total TVL.
- Looking into the top five events by claim amount, the average losses covered by insurance were only 6.47%. This means that for every $1M lost, only $64.7K was insured.
- This points to DeFi users being underinsured, and this can be attributed to the current insurance model struggling to find product-market fit.
- For more on this, Delphi members can read our Delphi Pro report here.
🐣 Notable Tweets
On BlockFi’s Bankruptcy
BlockFi just filed for bankruptcy.
Here’s what I know 🧵
Analysis of Uniswap
An analysis 🧑💼 on @Uniswap and areas of improvement for #DeFi trading infrastructure 💹
link: https://medium.com/friktion-research/defi-deep-dive-uniswap-part-2-8be77a859f47
🧵/n
-Alex (@thiccythot_)
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