Related Work

Architectural Models for Decentralized Insurance Protocols

Mutual and Peer-to-Peer (P2P) Models

Many foundational protocols, such as Nexus Mutual and Nsure, operate on mutual principles where users (capital providers) pool funds to cover losses in exchange for premiums, akin to traditional mutual insurance companies. In these decentralized mutuals, claims assessment is often determined by decentralized governance processes or votes by token holders (claim assessors), which can introduce subjectivity and processing delays.

Parametric Models

An alternative, purely algorithmic approach involves parametric insurance, which relies on trustless external data feeds (oracles) to determine payouts when predefined, objective trigger conditions are met (e.g., a specific drop in a stablecoin's price below its peg). This eliminates the need for subjective human claim assessment, enhancing efficiency but introducing reliance on the security and integrity of the oracle mechanism itself.

Tranche-Based Risk Allocation

More recent and complex models, like YieldShield, inspired by structured finance products such as Collateralized Debt Obligations (CDOs), propose splitting underlying capital pools into tranches with varying risk seniorities (e.g., A- and B-tranches). This design allows risk-averse investors to participate in lower-risk, lower-yield tranches while risk-takers absorb higher potential losses for higher yields. This mechanism eliminates the need for subjective, centralized, and potentially legally problematic claim assessment, community voting, or external data providers.