What does this means let say in event of Dex on Telos gets hacked or rugged by the team and funds stolen? Does this mean everybody farming on that Dex to get money back or how does this insurance partnership help in case of hacked/stolen funds?
Not sure, I haven't dug into the protocol, but you will need to pay for insurance, you don't just get it.
Will project pay for insurance of all their investors or each investor on it's own to pay insurance to protect only himself in case of a hack or rugpull by the team?
It probably depends on the project. Even if the "project" pays for it, it comes out of revenue ultimately paid by users
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