The DeFi insurance market is facing growth limitations. Critics point out that the current structure may fail to serve its purpose during crisis situations. Jesus Rodriguez, founder of the institution-exclusive DeFi platform Sentora, recently highlighted the fundamental vulnerabilities of the DeFi insurance collateral structure via his social media and proposed a new alternative.

Critical Flaw in the ETH-Centric Collateral Structure

Rodriguez explained that fatal problems arise when DeFi insurance uses Ethereum (ETH), wrapped tokens, liquidity staking tokens (LST), and other assets native to the ecosystem as collateral. When a hack or large-scale security incident occurs, the value of the collateral assets plummets at the exact moment insurance payouts are most needed. Ultimately, the stability of the insurance system itself can collapse.

These structural issues are acting as factors that hinder the growth of the entire DeFi market. Rodriguez pointed out that while the current total value locked (TVL) in the DeFi ecosystem stands at approximately $94 billion, the funds actually utilized for insurance fall short of even $1 billion. In particular, he noted that institutional investors frequently assess the risk as high during their investment review processes when insurance collateral is composed of DeFi assets such as ETH. He analyzed that the possibility of both the collateral and the insured assets declining simultaneously during a crisis serves as a significant burden on investment decisions.

The Alternative is 'External Assets'... Ripple (XRP) and Stellar Lumens (XLM) Draw Attention

Rodriguez proposed utilizing external assets with low price correlation to the DeFi ecosystem as collateral. By leveraging assets that are relatively independent of internal DeFi shocks, the capacity to pay out insurance claims can be maintained more stably.

In fact, Firelightfi's recent consideration of Ripple (XRP) and Stellar Lumens (XLM) as collateral assets is interpreted as a strategy to mitigate these structural risks. The analysis suggests that using assets with low correlation to internal DeFi ecosystem assets as collateral can alleviate the risk of collateral values plummeting in tandem during a hack or liquidity crisis.

In the market, voices are growing louder that in order for the DeFi market to expand institutional investor participation, it must improve not only smart contract security but also the stability of the insurance collateral structure and the risk management framework simultaneously.

[This article was written with the assistance of AI. This article does not constitute investment advice, and any losses resulting from virtual asset investments shall be borne by the investor.]