Stablecoin Depeg Cover is designed to protect stablecoins — cryptocurrencies whose values are pegged to an underlying asset — against losses resulting from a depeg event.

Takeaways

• Stablecoin Depeg Cover serves as protection against the financial losses that result from a specific stablecoin losing its peg to its underlying asset.
• What qualifies as a cryptocurrency depeg — a percent decrease from its pegged price, the length of time during which the stablecoin’s price is lower than its underlying asset — is pre-specified by each cover.
• Virtually all other risks, including those related to decentralized finance (DeFi) protocol (e.g. hacks, attacks, user error) and CeFi product use (e.g. custodian fund mismanagement, halted withdrawals), are not covered by Stablecoin Depeg Cover.

What is Stablecoin Depeg Cover?

A stablecoin, otherwise known as a pegged cryptocurrency, is a type of digital currency whose value is tied to an underlying asset, typically fiat (government-backed currency) such as the US dollar, or gold.

For example, 1 USD Coin (USDC) is designed to be worth $1 USD. A USDC holder theoretically has the ability to redeem 1 USDC for $1 USD at any moment.

The main risk in using a stablecoin is to have the token lose its peg to its underlying asset, which would result in financial losses, if the holder attempted to redeem it for its underlying asset. Stablecoin Depeg Cover is a type of protection designed to safeguard funds against this specific risk.

Cover vs. insurance

As DeFi insurance providers may not be insurance companies or mutuals, and cryptocurrency is not legal tender in most countries, cover is a more accurate term than insurance for this type of fund protection.

What it may cover

Stablecoin Depeg Cover can offer either total or partial financial reimbursement following a depeg event. Stablecoin Depeg Cover differs in terms of:

• What percent decrease in price qualifies as a depeg event
• How long a token has to be depegged for in order for the event to qualify as a depeg
• What percentage of the token’s original market price is reimbursed
• When the cover holder can file a claim
• When the claim is paid out For example, say that USDT were to fall from a trading price of $1 USD to a 10-day Time Weighted Average Price (TWAP) of 85¢. Stablecoin Depeg Cover that defines a peg loss as a drop in price of 10% or more and is designed to reimburse 90% of a token’s price would reimburse the cover holder 5¢ per USDT covered.

What it may not cover

Stablecoin Depeg Cover will not apply to events excluded from the original language or that occur outside of the cover period. As Stablecoin Depeg Cover is designed to protect against one risk — depeg — for one token, the majority of losses that result from DeFi, CeFi, and user-related activities fall outside the scope of this type of cover.

These may include losses resulting from:

• DeFi protocol use (e.g. (see Protocol Cover)
• CeFi product use (see Custody Cover)
• Cryptocurrency volatility
• Yield token depegs (see Yield Token Cover)
• The depeg of another stablecoin
• Off-chain scams (e.g. phishing) and attacks (e.g. hacks and malware)
• User error (e.g. private key loss)

How to choose Stablecoin Depeg Cover

• Identify which stablecoin to cover.
• Next, identify which DeFi insurance providers offer coverage for this use case.
• If there are several options, compare them in terms of claim assessment mechanisms, scope of coverage, cost, and other metrics outlined in How to choose DeFi cover.
• Select the cover period.
• Purchase cover.