Comment by: Jesus Rodriguez, co-founder of Sentora
If you look at decentralized finance (DeFi) as a basic set of computing, it’s remarkably perfect — but fundamentally broken.
We have automated liquidity market makers like Uniswap. We have lending markets for capital efficiency and money for “packaging”. Step back and look at architecture from a systems engineering perspective.
There is a gaping hole where the risk of return should be.
Insurance is the “lost primitive” of the decentralized web. It’s the translation layer that turns a scary, opaque technical risk into a readable string—a number you can compare, hedge, and budget for. Without it, we will not build a financial system; We are building a very sophisticated and high-end casino.
Insurance hasn’t worked yet
A lot of talk has been spent on why onchain insurance hasn’t “taken off” despite billions in total block value (TVL). Personally, I suspect the failure is structural, not just a “lack of attention.” We are fighting against the physics of risk management.
Most of the first generation protocols tried to use DeFi-native assets like Ether (ETH) or protocol tokens so that the same DeFi stack lives on those assets. This is a classic “reflex” trap. When major exploitation occurs, the entire ecosystem tends to collapse. The pledge loses its value at the exact moment of payment. From a systems perspective, this is a positive feedback loop. Like trying to insure a house against fire with a bucket of gasoline. In order to work, insurance requires proportional capital: assets that don’t care if a particular smart contract expires.
Historically, we have relied on retail farmers to provide “cover”. These users don’t wake up worrying about actuarial spreadsheets or underwriting. They care about APY and points. This is not the stable, long-term underwriting base needed to build a multi-billion dollar risk engine. Real insurance requires a base of “low cost of capital” – institutional grade assets that sit and collect a steady spread of 2%-4% without the need to “threaten” 100% APY schemes.
The imperative of scale
We’ve been talking about TVL as the North Star of DeFi for years. TVL is a vanity measure; it tells you how much capital is in the “danger zone”. The metric we really need to optimize – the one that actually measures industry maturity – is Total Value Covered (TVC).
If we have $100 billion in TVL but only $500 million in TVC, the system is effectively 99.5% “bare”. In any traditional engineering discipline, this would be considered a catastrophic failure within safety margins. You don’t fly on a plane that is 0.5% “safety tested”.
The scaling goal for the next DeFi era is to bridge this gap. We need a way where TVC scales linearly with TVL. Currently, they are separated. TVL grows exponentially based on assumptions, while TVC flows linearly because “risk markets” are non-standard and manually managed. DeFi scaling is not just about Layer 2 transmission; it is about “passing the risk”.
Ghost pricing on the car
We often talk about risk as something ethereal and scary that happens to other people. In a mature financial system, risk is a commodity. It should be made rich.
Think of DeFi insurance as a risk pricing engine. Currently, when you deposit into a warehouse, you are consuming a bundle of risks: smart contract risk, oracle risk, and economic design risk. These risks are worthless in the moment – they are just your hidden baggage.
By building a solid insurance foundation, we turn these hidden risks into business assets. We’ve gone from “I hope this breaks” to “The market says the probability of this breaking is exactly 0.8% per year, and here’s a tokenized instrument that pays if it breaks.”
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This asset is powerful because it creates a market signal. If the cost of covering Protocol A is 5%, while Protocol B is 1%, the market has effectively “priced in” the security of the code. Insurance is not just a safety net; it is the global oracle for protocol health. It turns “security” from a vague marketing claim into a hard, fluid price.
The dream of programmable insurance
The “end state” of this technology isn’t just a decentralized version of Geico—it’s a transition from legal insurance to billable insurance.
Think about the difference between a traditional legal contract and a smart contract. Traditional insurance includes 40-page PDFs, adjusters, and a six-month claims process. This is a “man in the ring” obstacle.
Programmable insurance is a primitive that can be inserted directly into the transaction stack. It includes granular cover and atomic payments. You don’t just “insure the protocol” in the abstract. You are insuring a specific LP position, a specific oracle channel or even an expensive transaction. If the state of the blockchain detects an exploit, the payment will be made in the same block. There is no “Claim Department”; there are only “state tests”.
This makes the insured a “first-class citizen” in the code. You can imagine the “Insurance” button on every swap or deposit, just like today you select “preferred gas”. It becomes a transition in the UI.
The next wave of DeFi adoption
The real challenge of DeFi adoption is convincing 1000’s of others to use the money; it includes fintechs and neobanks.
These institutions are already knocking on the door. They look at 5% risk-free rates and compare them to their legacy rails, which are tied with overheads and tenants. However, for a neobank (think firms like Revolut, Chime or Nubank), “The Code is the law” is not the right risk management strategy. Their regulators – and their risk committees – won’t allow it.
For these players, insurance isn’t about “being happy”; This is a strict requirement for deployment. They represent the next wave of “trillion dollar” liquidity, but for now they are standing on the sidelines. They need a “wrapper” that makes DeFi look like a bank account.
If we can provide a solid layer of programmatically supported insurance, we’re not just protecting the poor; we provide a “regulatory shield” that allows neobank to deposit $1 billion of customer deposits into a loan fund. Insurance is a bridge between “crypto-maternity” and “global finance”.
We have spent the last few years building the “engine” of the new financial system. We have pistons (fluid), transmission (bridges) and fuel (capital). But we have forgotten the brakes and airbags.
Until we sort out the basics of insurance, DeFi is a niche test of risk tolerance. By shifting our focus from TVL to TVC, moving to disproportionate collateral and embracing the ‘pricing engine’ of asset risk, we can ultimately transform this practice into a sustainable, global service.
There is a lot of code to write and the risk of underwriting is even greater.
Comment by: Jesus Rodriguez, co-founder of Sentora.
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