This study develops a pricing and contract design framework for cryptocurrency catastrophe (CAT) bonds to transfer extreme crypto-native risks, including protocol exploits, exchange breaches and decentralized finance (DeFi) failures, to capital markets. The paper aims to address arbitrage-free valuation, sponsor-optimal contract design and trustless settlement under the unique informational and operational features of blockchain systems.
We propose a multi-trigger crypto CAT bond structure that jointly captures short-term catastrophic shocks and long-term systemic deterioration through oracle-reported loss metrics. An arbitrage-free valuation framework is developed under an incomplete market setting using the minimal martingale measure, while sponsor-optimal contract design is formulated under a dual-measure framework. Empirically, crypto loss dynamics are modeled using generalized extreme value distributions and copula-based dependence structures, whereas financial risk factors are modeled through ARIMA–GARCH and vine copulas. A smart-contract-enabled on-chain settlement architecture is further introduced to automate trigger evaluation and cash-flow execution.
Empirical results based on REKT crypto incident data demonstrate strong dependence between monthly extreme and aggregate losses, with heterogeneous dependence structures across blockchain ecosystems. Simulation studies show that trigger and principal repayment designs substantially affect bond price distributions and tail risk exposures. Conservative trigger structures generate more stable bond valuations, whereas aggressive structures exhibit greater downside dispersion. The proposed framework supports economically viable risk transfer while enabling transparent and timely settlement through blockchain-based execution.
This study develops, to the best of our knowledge, the first integrated framework for crypto native catastrophe bonds that combines arbitrage-free pricing, sponsor optimal contract design and smart contract-based on-chain settlement. Unlike traditional CAT bonds or cyber insurance-linked securities the proposed framework explicitly incorporates oracle-based observability, crypto-specific dependence structures and automated settlement, providing a novel mechanism for transferring systemic digital asset risks to capital markets.
