Chainproof will be the world’s first regulated smart contract insurance provider. Incubated by Quantstamp and backed by Sompo and reinsured by MunichRe, Chainproof offers regulated insurance against hacks for non-custodial smart contracts on a public decentralized blockchain.
A New Frontier
Chainproof is bringing a completely new type of insurance to the market, insuring digital assets stored non-custodially in specific smart contracts. Up to this point cryptocurrency investors could only buy regulated insurance for assets they hold in their hosted wallets. As soon as those assets left the hosted wallet and were deposited into DeFi, they were no longer insured. This is exactly the gap in the insurance market that Chainproof is bridging. With the insurance product offered by Chainproof the insured entity maintains control of their assets while being covered by insurance policies that are fully regulated and compliant—currently impossible with existing digital asset insurance or cyber insurance products, which are offered only for custodial solutions.
Chainproof is a subsidiary of Quantstamp and is proud to be backed by some of the top names in Web3 including Lido, Kyber, Amber Group, MakerDAO, Badger, DeFi Alliance, The Graph, Coinlist, Zynga, Illuvium, Hashgraph, Rally, Celo, Polygon, Blockfolio, Dapper Labs, and more.
Demand for Smart Contract Insurance
With over $70B of digital assets locked into DeFi protocols across various blockchains, DeFi is a rapidly growing market with huge potential. However, being a nascent industry means this potential comes with a significant amount of risk—it’s estimated that around $10.5 billion was lost due to hacks and exploits in 2021 alone. While audits are an essential component in mitigating risk, they never completely eliminate the possibility of bugs and exploits.
The lack of regulated insurance coverage has prevented DeFi from maturing and kept many institutional investors on the sidelines. While there are already some unregulated DeFi insurance products on the market, they typically don’t meet the needs of most institutional investors due to a lack of compliance with KYC and AML regulations. Similarly, traditional insurance companies can’t back unregulated insurance products,as they could inadvertently pay out claims to illegitimate parties such as those involved in money laundering or terrorist activities. Despite the overwhelming demand for regulated insurance products for DeFi protocols and their smart contracts, this need has been historically difficult to meet due to some fundamental challenges.
The Challenge with DeFi Insurance
In the insurance industry, underwriting is the insurer’s assessment of the risk and profitability of offering a given policy. The process involves using data, statistics, and actuarial recommendations to quantify risk and assess the likelihood of an incident occurring. Historically, this has presented a significant hurdle in terms of providing insurance coverage to DeFi protocols. Traditional insurance providers lack the technical context and deep understanding of the space, both crucial in properly pricing insurance coverage.
After protecting over $200B in digital asset risk from hackers and having worked with some of the top projects in the space, Quantstamp has the technical knowledge and experience to accurately assess and underwrite risk. MunichRe and Sompo are global leaders in property and casualty insurance with a track record dating back to the 1880s. Their deep industry experience across multiple insurance verticals, coupled with Quantstamp’s blockchain and security expertise, will give Chainproof an unmatchable advantage in becoming the world’s leading smart contract insurance provider.
The BMA sandbox license will allow Chainproof to demonstrate the market demand and product-market fit, first offering products covering certain DeFi protocols on the Ethereum blockchain to select institutional asset managers looking to deploy capital into DeFi. During this period, Chainproof will create a production insurance policy with MunichRe to underwrite and insure $10M in DeFi risk with a customer from one of the following four personas:
- Asset Manager: An institutional asset manager with over $1B AUM invested in financial products such as fixed income, equities, and real estate.
- Corporation: A publicly-traded company listed on a stock exchange that will use its treasury funds to grow its balance sheet.
- Market Maker: A large bank or financial institution that stands ready to buy and sell equities and assets on a regular and continuous basis at a publicly quoted price.
- Venture Capital Firm: An investment company with over $100M AUM that invests in companies in exchange for an equity stake.
After graduating from the BMA Sandbox, Chainproof’s next phase will involve scaling its product portfolio, customer base, and operations, offering the product to other Ethereum DeFi protocols as well as protocols on other blockchains. Chainproof’s client-base will then expand to include institutional asset managers, financial institutions, smart contract software developers, and even retail users.
Our Journey to Launch Chainproof
The journey to Chainproof began in 2019 when Quantstamp first saw the incredible untapped potential for insurance within the DeFi space. Many clients had the desire for DeFi exposure but remained on the sidelines given the significant risk of hacks and exploits, and the difficulty to offset some of this risk. In traditional finance, institutions use historical data to hedge against risk; periods of stability have provided the reliable data needed to create statistical actuarial models. In contrast, DeFi is a nascent field, having only existed for a few years while simultaneously experiencing massive growth; consequently, risk assessment remains underdeveloped in the blockchain space.
Early insurance solutions focused predominantly on custodial solutions such as wallets and exchanges—for example, insurance policies covering Coinbase’s hot wallets or Crypto.com’s cold storage wallets. Realizing the unmet demand present in this space, Quantstamp worked to develop various solutions. One approach involved connecting audit clients with traditional insurance companies, with Quantstamp serving as an actuary to properly assess the risk. Another approach involved offering smart contract warranties to clients that had recently been audited. While these approaches addressed some of the demand, there was a consistent need for a more formal product.
The team began talking to regulated insurers about coming up with a solution that would meet the increasing demand for DeFi insurance while allowing institutional clients to comply with regulatory requirements. Quantstamp faced persistent reluctance from some of the biggest names in the insurance industry to underwrite this new type of risk, but in the summer of 2021, Quantstamp partnered with Sompo to create Chainproof. Since then, Chainproof has developed a first-of-its-kind cyber-insurance policy for non-custodial DeFi platforms and has been working with regulators such as the Bermuda Monetary Authority to help create a legal framework for this innovative product.
Our vision is that by 2025, Chainproof will be the primary choice for those looking to purchase smart contract insurance. Many things have changed over the past three years, but we are proud to have taken our original vision from a decentralized, unregulated solution to where Chainproof is today: making history and bringing an entirely new primitive to the DeFi space.