Paper: arXiv 2212.10308
Authors: Matthias Nadler, Felix Bekemeier, Fabian Schär
Abstract
In this paper, we propose a fully decentralized and smart contract-based insurance protocol. We identify various issues in the Decentralized Finance (DeFi) insurance context and propose a solution to overcome these shortcomings. We introduce an economic model that allows for risk transfer without any external dependencies or centralized intermediaries. In particular, our proposal does not need any sort of subjective claim assessment, community voting or external data providers (oracles). Moreover, it solves the problem of over-insurance and proposes various ways to mitigate the capital inefficiencies usually seen with DeFi collateral. The work takes inspiration from peer-to-peer (P2P) insurance and collateralized debt obligations (CDO). We formally describe the protocol, assess its efficiency and key properties and present a reference implementation. Finally, we address limitations, extensions and ideas for further research.
Complexity vs Empirical Score
- Math Complexity: 4.5/10
- Empirical Rigor: 3.0/10
- Quadrant: Philosophers — conceptual discussion, limited math and data
Why this score: The paper introduces a novel, oracle-free decentralized insurance mechanism inspired by CDO structures and P2P risk sharing. While the conceptual framework and protocol mechanics are well-articulated alongside a reference implementation, it lacks rigorous empirical backtesting and statistical validation using historical DeFi market data.
Research Flowchart
flowchart TD
A[Research Goal: Create a Fully Decentralized DeFi Insurance Protocol] --> B[Identify DeFi Insurance Issues: Oracles, Voting, Capital Inefficiency]
B --> C[Design Protocol Architecture: Combine P2P Insurance & CDO Tranches]
C --> D[Develop Economic Model: No External Data, Autonomous Claim Payouts]
D --> E[Formalize Protocol & Build Reference Implementation]
E --> F[Outcomes: Eliminates Over-Insurance & Centralized Intermediaries]