In brief

  • Opium Insurance says it will offer DeFi users new tools for hedging risk.
  • Opium Protocol raised more than $3 million in venture funding in October.
  • Premiums paid by insurance buyers present another opportunity for yield for liquidity providers willing to take the risk.

Opium is showing up to the DeFi party, but it’s bringing something far less risky than its name applies: insurance.

Opium Protocol announced today the impending launch of Opium Insurance, a tool designed to help traders hedge risk while charting a course through the risky waters of DeFi. Opium says it will offer tradable, customizable insurance tokens funded by pooled liquidity. The intention is to provide simplified coverage that could push the envelope of new coverage products emerging from the DeFi landscape—in an ecosystem that is anything but simple.

Opium Protocol launched a hedging product for Tether in September and raised more than $3 million in a funding round led by QCP Soteria, HashKey, and others in November this year. The insurance is an intentional expansion of Opium Protocol’s core focus on decentralized derivatives. 

“Over the summer we’ve learned that there is a lot of demand for these products and we didn’t see a lot of competition there, so we doubled down on it,” Opium Protocol product and community manager Deniz Yilmaz told Decrypt.

DeFi, short for decentralized finance, denotes a collection of blockchain-based protocols that provide financial services without the use of a centralized routing authority, like a bank or broker. Instead, DeFi protocols offer products like asset swaps, loans, and interest on customer deposits using automated code known as smart contracts.

But for all the innovation DeFi brings, risks abound in such a pioneering financial ecosystem. MakerDAO, a crypto-asset backed lending service saw borrowers lose millions following a liquidation exploit caused by Ethereum network congestion in March this year, and a November report from blockchain security firm CipherTrace estimated DeFi hackers were taking home $10 million a month on average.

Insurance buyers using Opium Insurance can get coverage for loss on digital assets due to hacks or exploits, and can also create coverage for losses like stablecoin or custodian insolvency. The coverage, distributed in token form, can be traded on exchanges or turned in to claim payouts for losses from liquidity providers who issue coverage tokens. Premiums for coverage paid by insurance buyers are paid out to liquidity providers.

“DeFi consists of various risks that create a bottleneck for institutional adoption,” Aave founder Stani Kulechov, who is also an Opium Protocol advisor, told Decrypt. Aave is one of the largest DeFi protocols by total assets held, according to data aggregator DeFi Pulse. “Opium Network aims to mitigate the risks in DeFi by providing hedging with insurance and derivatives. Insurance is much needed in DeFi at the moment.”

Insurance may not be the most exciting business, but it may be essential for the growth of financial products and services, especially in a sector as risky as DeFi.