As decentralised finance continues to mature, one question remains central to its long-term growth: what happens when a protocol fails, and who protects the capital exposed to it?
Firelight Protocol
This was the focus of a recent Surgence broadcast, featuring Connor Sullivan, Chief Strategy Officer at Firelight. Drawing on his experience in traditional reinsurance at TransRe and digital asset infrastructure at Fireblocks, Connor explored why protection has struggled to keep pace with DeFi’s growth, and how Firelight is approaching the challenge differently.
The scale of the problem is significant. As Connor highlighted, DeFi holds close to $100 billion in total value locked, yet less than 2% is covered by anything resembling insurance. The conversation explored why traditional insurance models have struggled to translate into DeFi. Protocol risks are dynamic, interconnected and constantly evolving, making them difficult to assess through conventional underwriting frameworks. Addressing this requires more than adapting existing insurance products; it calls for infrastructure designed specifically for onchain markets.
This is where Firelight comes in. Rather than operating as a traditional insurer, Firelight establishes an onchain marketplace connecting capital providers with protocols and platforms seeking protection. Stakers deposit capital into non-custodial vaults, starting with FXRP (XRP on the Flare Network), with support for additional assets planned as the protocol expands. This capital backs a portfolio of cover markets, while platforms pay fees to enable protection. Stakers receive a share of the fees paid for cover in return for providing the capital.
Crucially, the protection is defined before an incident occurs. Firelight publishes coverage parameters onchain, covering six specific failure modes: smart contract exploits, oracle failures, governance exploits, mechanism-driven bad debt, mechanism-driven depegs and redemption failures. Ordinary market price movements are not covered.
Connor also addressed perhaps the most important question surrounding DeFi protection: who decides whether a claim is valid? Firelight’s independent Risk Consortium, comprising five security, risk and insurance firms (Hypernative, Cyfrin, Credora, GFX Labs and Native), reviews incidents against predefined coverage criteria. This introduces independent oversight into the claims process, rather than leaving decisions solely to the parties providing the cover. As Connor put it, the ambition is to create an “onchain FDIC-type experience, combining the speed of settlement and other benefits of DeFi with risk abstracted away from the end user.”
Since launching on 6 October 2026, Firelight has extended coverage to Kraken’s Protected Strategies USDC vault and Sentora’s RWA and USD Protected vaults, with further integrations planned. The broader ambition is to make protection an embedded feature of onchain financial products, rather than something users have to seek out separately.
The conversation closed on a bigger question: what would DeFi look like if protection became as fundamental as liquidity, yield and security? For Firelight, building that missing layer is essential to making onchain finance more resilient and accessible to a broader range of participants.
Tune in to the conversation with Connor Sullivan on Surgence Labs to hear more about Firelight’s approach to closing DeFi’s protection gap and the future of onchain risk management.
