No matter how conservative your investments, the only place where you can expect near-zero risk is in a FDIC-insured bank account - it's also the place where your money is most likely to collect dust or worse, lose value due to inflation.

So what is financial insurance? After the Great Depression when a nationwide run on banks prevented many from withdrawing their savings, the Federal Deposit Insurance Corporation established protection for individual deposits up to a certain amount ($250,000 as of 2021). This insurance means that no matter what—your bank is hacked, it goes out of business, it can't collect its loans—you are entitled to the money in your account.

Once you're invested in other asset classes, such as ETFs or stocks, this insurance does not apply. In the market, there's the possibility that fluctuations in the market could leave you with less money than your initial investment.

Insurance vs Coverage

Coverage, on the other hand, is a means of lowering risk on loans. Donut's lending partners require high collateral (100-200%) from borrowers. This means when you have $5,000 earning with Donut, our lending partners hold collateral (often in the form of ETH) worth $5,000-10,000. For the borrower, this enables them to leverage their existing asset (ETH) to make new investments with DAI and other stablecoins.

In the case of a default, the partner can liquidate the collateral to ensure you still have access to your funds. Coverage through high collateralization is a way to reduce lending risk (see above).

Coverage, however, is not insurance. In the case of platform or technology failures within DeFi, there is a possibility you'll lose access to funds or even lose your investment.

It is important that you keep this distinction in mind when investing with Donut, or any other financial product; only invest amounts you could, in an unlikely scenario, tolerate losing. Donut is a simple way to invest in DeFi and diversify your portfolio—it is not an alternative to an FDIC-insured bank account.

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