Stablecoin insurance firm Bridge Mutual to protect against possible Tether depegging

Years of regulatory uncertainty around Tether could be offset by newfound investor confidence if an emerging insurance protocol for USDT gains traction.

While the value of stablecoins like Tether (USDT) and USD Coin (USDC) is designed to be pegged to another asset, such as the U.S. dollar, the crypto industry has fretted for years about the possibility of a major depegging — especially amid U.S. regulatory concerns about Tether, which has a current market capitalization of over $63 billion.

Now one company intends to provide discretionary coverage for investors against that scenario — and Tether itself is backing the play.

Bridge Mutual aims to mitigate the risk of loss of funds resulting from hacked or exploited smart contracts, exchange hacks or theft, price crashes in stablecoins, and other digital asset vulnerabilities.

Stablecoin insurance is uncomplicated in principle. If a stablecoin drops beneath its peg for a set period of time, the policyholder can make a claim. Oracles check the current price of the stablecoin and then pay the investor back the overall difference between the current price and the peg — but in a different stablecoin.

Related: How stablecoins stay stable, explained.

"Smart contract vulnerabilities have become a massive risk in decentralized finance, and they are a leading cause in the loss of millions of dollars in consumer funds,” said Paolo Ardoino, CTO of Tether. “With the introduction of Bridge Mutual, we hope to guard against future hacks and build more trust in DeFi products."

As Bridge Mutual moves toward a decentralized governance model, Tether has been quick to express support financially. The stablecoin issuer has earmarked $500,000 for token acquisition — as has Bitfinex, the cryptocurrency exchange that is closely tied to Tether Limited through its ownership. Those tokens should ensure that both companies have a stake in Bridge Mutual’s governance.

Mike Miglio, Founder of Bridge Mutual, explained that “Tether and Bitfinex have already shown great support to the project by connecting us with many other esteemed projects that have now become our partners, and they have also committed to helping us market Bridge Mutual, improve the design, and integrate it into other platforms and systems."

Policyholders deposit their tethers into pools to use as collateral, and in exchange for their stakes they can also share in profits from the platform and earn yield, according to Miglio.

“Billions of dollars of volume a day are moved to and from stablecoins, with people and institutions trusting implicitly that the value of a stablecoin will remain stable,” continued Miglio. “If coverage for stablecoins was readily available and easy to use, everyone would be able to increase their exposure to the cryptocurrency market without losing sleep over whether all of the value they have parked in stables could drop to zero overnight.”