❔Why Pharo

Decentralized Finance (DeFi), also referred to as 'open finance', is the ecosystem of financial applications developed on top of blockchain and distributed ledger systems. It's also referred to as 'Lego of Finance' where ordinary people can use smart contract to create a new finance world which given people quicker access to services and activities like: payments, lending, borrowing, funding, or investing. With the blooming of DeFi ecosystem, DeFi player is creating more and more wealth and stakes. Insurance, the stabilizer of the finance system, arrives at a slower pace. According to the data from DeFi Pulse, only three notable insurance protocols are available out of the 100 major DeFi projects been selected, i.e., the Nexus Mutual, Opyn, and Augur.

Nevertheless, the overall coverage by the existing insurance projects of DeFi TVL is deficient. According to Nexus Mutual, the peak asset value covered is US$246M, which is merely around 2% of all assets across the landscape.

After extensive research on existing insurance products, we categorize them into 3 types with further comparisons listed below.

• Mutual Insurance, such as Nexus Mutual

• Financial Derivatives, such as Opyn

• Prediction Markets, such as Augur

Element	Mutual Insurance	Prediction Market	Financial Derivative
Product	Nexus Mutual	Augur	Opyn
Capital & Liquidity
Common Capital Pool	Yes	No	No
Fully Collateralized	No	Yes	Yes (nearly always)
Liquidity	Customer to Pool	Two-Sided Market	Two-Sided Market
Flexibility
New Products	Low	High	High
Risk Coverage	High	High	High
Claim Assessment	Voting	Voting	Not Required
Pricing
Extreme Risk	Good	Not so Good	Not so Good
At the money Risk	Not so Good	Good	Good

Despite the development of existing DeFi insurance projects, we note that mutual is still the mainstream of DeFi insurance. However, there are still a few common issues that need to be addressed.

Deficient Product Accessibility

There are some limitations on product accessibility for existing products, such as:

• High premium: especially for the protocols with less staked pool;

• KYC-based membership: which contradicts the free and open ethos of DeFi;

• Limited cover capacity: which often frustrates customers when they need to buy covers for their intending protocols;

• Lack of coverage for new protocols: which is often lagged behind the industry pace and unable to support the latest protocols;

• No cross-chain coverage: which limits the protection capability to DeFi protocols on other public chains;

• Lack of protection diversity: which is limited to cybersecurity protection only compared to the broad coverage of risk types in traditional insurance landscape;

Inadequate Risk Management

Risk management lies at the core of any insurance business. However, current DeFi insurance products still have much room to enhance their risk control capabilities, such as:

• Cybersecurity: programmatic/logical flaw of Insurance protocol

• Concentration risk: the capital pool is often highly concentrated on a few major protocols, and the platform is solely relying on Ethereum;

• Claim assessment: the existing claim assessment is handled grossly with a Yes/No judgment only, without quantified evaluation of the loss;

• Risk evaluation: operational/market/credit risks are not well evaluated or taken into account for the platform design and operations.

Capital Inefficiency

Capital efficiency constitutes the cornerstone for any insurance company, which benefits both the insurers and the insured systematically. However, low capital efficiency is another pain point for existing DeFi insurance products, such as:

• Low reserve utilization: the capital injected into the insurance platform is often not well managed, leading to the low utilization of the reserved fund, which can be employed delicately;

• Unsustainable investment return: Like traditional insurance businesses, customers expect to gain sustainable investment return on the money they place into the insurance company.

We have seen the market demand for more insurance projects to enhance the risk management infrastructure of the DeFi ecosystem and seek improvements to address the challenges mentioned earlier. Therefore, we propose this solution, the Pharo Protocol, with core value creations.