Polkadot-Based DeFi Insurance App Raises $1.95M Led by KR1

Insurance startup Tidal Finance has raised a $1.95 million seed round for its TIDAL token, led by European digital asset company KR1.

New York-based Tidal will use the Polkadot blockchain to allow users to contribute funds that insure a set of decentralized finance (DeFi) applications against smart-contract failure or breaches in one pool, theoretically improving the capital efficiency for DeFi investors interested in insurance. Other participants in the round included NGC Ventures, Kenetic Capital, Genesis Block and others.

The pioneer in protocol insurance is Ethereum-based Nexus Mutual, which funded itself with a token sale and paid out its first claim in February, following the first round of attacks on bZx, the flash loan provider. 

Tidal believes there are refinements that can be made on the model, however, and that there will be advantages in building it on an up-and-coming layer-one blockchain.

In the works since early this year, the company detailed its project on Medium in October. CEO and founder Chad Liu said the team chose Polkadot because it should eventually allow for more sources of liquidity to provide insurance, therefore attracting more people to buy insurance.

"The Polkadot network will connect more chains when it becomes mature. It's a bigger addressable market," Liu said.

Polkadot's lower gas prices will also help users, particularly if some pools eventually require more frequent payments in order to reflect changes in variable rates.

Notably, applications do not need to be on Polkadot to be insured by Tidal. In fact, it's likely that many of the first applications covered will be on Ethereum, since that's where basically all of DeFi runs for now. That said, if a well-resourced EOS holder wanted to draw insurance premiums, Tidal's team believes they might be more likely to deposit on a Polkadot-based application, once it connects to EOS, simply due to lower friction.

Tidal sees this as its chief innovation: liquidity providers backing insurance will protect multiple applications in one pool (rather than each liquidity provider insuring one application at a time, as on the earlier projects). 

At launch, Tidal expects to provide three different pools – low, moderate and high risk – with as many as 20 applications in lower-risk pools.

Backing pools of assets rather than one at a time enhances the capital efficiency, Liu said, allowing backers to earn premiums from many applications at once.

The TIDAL token will earn a portion of the fee charged when people originate cover and it will also serve as a governance token for the application. Insurance premiums will go to liquidity providers in Tidal's pools.

Liu said there will be a fixed supply of 20 billion TIDAL tokens. 

The details of the token-economies are still somewhat limited, but a distribution breakdown shared with CoinDesk showed that about 12% was designated for the token sale, 10% for the team, 12% for a liquidity mining program (the website indicates this would be a reward for those who fund insurance pools) and 39% for staking rewards (no details on this have been released). The rest is divided up between reserve, treasury and ecosystem. 

Tidal estimates that the first insurance pools will go live in the first quarter of 2021.

Update (Dec. 22, 19:12 UTC): There will be 20 billion TIDAL tokens, not 20 million.