Web3 and blockchain applications for real world problems

Abstract

In recent years, the rapid growth of Decentralised Finance (DeFi) has revolutionised traditional financial services, with approximately $120 billion in total value locked (TVL) across various protocols. However, this expansion has been accompanied by significant security challenges, including major losses from DeFi hacks alone. The absence of centralised safety nets and the technical complexity of smart contract auditing have created substantial barriers to mainstream DeFi adoption, particularly among risk- averse users who lack the expertise to assess protocol vulnerabilities independently. This report presents the design and implementation of a decentralised insurance protocol that addresses these critical risk management challenges through an innovative tokenisation model. The proposed system introduces Insurance Tokens (ITs) and Principal Tokens (PTs) as the core mechanisms for providing insurance coverage against smart contract exploits and protocol failures in DeFi. ITs represent units of insurance coverage that can be freely traded on decentralised exchanges (DEXs) until expiration, enabling a liquid secondary market for DeFi insurance. PTs represent ownership stakes in the coverage fund, allowing underwriters to provide capital while maintaining the flexibility to exit positions through token sales or redemption at maturity. The protocol hopes to create a more accessible DeFi ecosystem by providing transparent, efficient and accessible insurance coverage, ultimately contributing to broader DeFi adoption and establishing a trustworthy framework for on-chain risk management.