The majority of DeFi coverage sold today falls into this category. Nexus Mutual is the biggest player in on-chain voting insurance. We certainly commend Nexus Mutual for bringing insurance into the 21st century when they launched their on-chain coverage platform in 2019. By using the blockchain to validate and distribute claims, Nexus created a system which should be more efficient than centralized providers.
However, the problem with Nexus Mutual (and their clones) is a lack of objectivity. Nexus Mutual claims are assessed and validated by a vote across Nexus Mutual token ($NXM) holders. At the same time, $NXM stakers are also responsible for paying out claims. Because of this lack of objectivity, in the event of a hack where a lot of value was insured, there is no guarantee that $NXM holders would vote to pay out. So far Nexus has only had to pay out small amounts compared to the amount they insure.
Theoretically, these $NXM holders should consider the long-term interests of the protocol and try their best to pay out valid claims. But how can policyholders really be sure they will be fairly compensated in the event of a large hack? The only backstop is a nebulous vote from the Nexus “Advisory Board” threatening to burn staked $NXM if dishonest voting is detected.
This is how Nexus Mutual describes their approach in their whitepaper: “Designing incentive structures resilient to game theoretic attacks is very challenging. The approach described has a basic incentive structure at its core and then overlays timing windows and human intervention to prevent more extreme scenarios.”  Even Nexus Mutual acknowledges that what they have built is a game-theoretic balancing act. There is a better, more objective way to secure Defi- the Third Wall.
As DeFi matures and more traditional institutional investors come into this space, an anonymous, voting-based insurance solution will not be a convincing security model. Furthermore, Nexus’s voting mechanism also goes against the ethos of DeFi in some ways. In the ideal case, the only thing the user needs to trust is that smart contracts will execute as written. Nexus Mutual and its clones are built on shaky ground, and the DeFi community needs a better alternative.
Some protocols, such as Aave, have attempted to insure themselves through a safety module. Typically, this works in the following way: the protocol's users have the option to lock their governance tokens in return for inflationary rewards. These governance tokens will be confiscated and used in the event of a hack. One general issue with these models is that in the event of a hack, the value of the governance token will fall-which may make it difficult to fully compensate users.
An additional issue with the Safety Module architecture is it has problems with aligning incentives. Often (as in Aave's case) governance token-holders are the ones validating and paying out claims, while they are also the same group that is held responsible for paying out the claims in the event of a hack.
Safety modules are an interesting bridge solution. They may allow protocols to get some protection while other alternatives either do not exist or have other problems. But broadly speaking, we believe it makes the most sense for protocols to outsource their coverage needs to a third-party like the Third Wall.
At Third Wall, we have built a more decentralized, simple, and trusted coverage solution for smart contract hacks. Our architectures are fully decentralized-they do not require policy-holders to trust a centralized insurance company or a set of anonymous voters to receive their claims. We plan to start by launching our "Optionality" architecture, then later launch "Automated Claims" depending on market demand.