Decentralized Finance or DeFi has lately become one of the trending issues in the insurance sector. The crypto industry is bombarded with articles trying to explain what DeFi entails. Although the DeFi community rarely mentions insurance, this is one industry with a significant opportunity to bring confidence to investors and protect their assets. Insurance is a risky finance industry that requires methods and strategies to guard businesses against risks. The industry is currently worth billions of dollars and faces its share of shady activities.
What is DeFi?
Most organizations in the world, especially those in the finance sector, are based on a centralized type of power. For anything to take place, there has to be a centralized authority to make a decision. Decentralized finance, therefore, means that a network can make its own decisions based on the collective ideas and thoughts of others, for example, a smart contract where the collateral is set, such as escrow. We can further describe DeFi as a finance network that uses Ethereum protocols, digital assets, smart contracts, and decentralized applications (dApps) to create a secure open-to-all financial platform.
The main idea is to move the trust back to the community from insurers while maintaining the integrity of the contracts and eliminating any form of risk. This shift would mean that what a trusted party used to accomplish is now done using equally trusted techniques. And above all, that piece of autonomous code will work for the mutual benefit of each participant and community contributors, with the help of specific incentives or cost reductions.
Decentralized Insurance Protocols
Etherisc is a DeFi protocol for decentralized insurance applications to make insurance transactions more efficient, enable lower costs, and provides greater transparency. The platform is a marketplace for insurance products and services, where the rules of the protocols are binding to everyone. Companies offering services through Etherisc stake a certain amount of DIP as collateral if they can’t maintain their quality service. Etherisc further allows for other insurance dApps on the platform and does not rely on anyone particular dApps’ success to be successful. However, it is worth noting that products made on Etherisc can offer insurance in any native currency (not necessarily DIP token) and seems like DIP tokens do not have much utility other than staking by teams that build the dApps.
Nexus Mutual is a decentralized insurance platform built over Ethereum and is responsible for smart contract cover. It is made up of a risk-sharing pool governed by members with NXM token as membership rights. Nexus mutual allows members to buy insurance on Ethereum smart contracts at any public level. Nexus mutual acts as an autonomous platform which provides protection against cases of hacking and discards the need for a middle man and middleman fees during transactions.
Cryptocurrency continues to explode in popularity and promises to revolutionize the financial market. To capitalize on opportunities, cryptocurrency traders invest billions each year through centralized exchanges. However, transactions remain vulnerable to unrelenting cyber-attacks. Since 2011 over 60 major cryptocurrency hacks have occurred worldwide, with investors facing 12.6 billion dollars in losses. These hacks are so aggressive and frequent; it is estimated that hackers have stolen 14% of all bitcoin and ether in existence today. Hackers target centralized exchanges due to weak security protocols and vulnerable infrastructure. As a result, transactions remain the largest source of credit risk in the crypto ecosystem. Over 70% of investors store their crypto assets on exchanges; cyber-attacks have shaken the crypto ecosystem to its core and fueled investors’ worries about fraud, frauds, and lax regulations.
CDX is a revolutionary smart contract protocol that allows for the trustless, issuance, trading, and resolution of credit swaps on the Ethereum blockchain. CDX solves the problem of hedging credit risk through an entirely new asset class, Tokenized credit default swaps. CDX protects investors’ crypto assets and insures against hacks and scams. It eliminates credit risks allowing investors to store their digital assets on exchanges with confidence that their all-important liquidity is maintained. Also, investors gain transparency into the genuine credit risk of transactions and can finally trade with confidence.
Aigang is an autonomous insurance network with fully automated insurance and a platform for insurance innovation. The network brings together IoT devices, data, and autonomous insurance by making use of AIX token and prediction markets to crowd-source community intelligence. This is then used to build new insurance products and power the insurance DAO protocol. Aigang Network members stake their predictions using smart contracts, whether they are bullish or bearish on particular insurance pools or commodities. Aigang uses a proof of stake (POS) and proof of reputation (POR) algorithm based on AIX token ownership and reputation score. Therefore, Aigang network allows for the crowd to forecast insurance that can be profitably applied to new and existing insurance products and reward AIX token holders with appreciation in their symbolic value.
Benefits of Decentralized Insurance
One of the benefits of decentralized insurance is that it secures most deposits against any loss cases. Etherisc, as mentioned above, is one such platform that does this. DeFi is considered secure and thus a solution to cases of hacking, especially in exchange platforms. Operating the so-called “autonomous” smart contracts has proved to be a challenge. This is due to the lack of upgradeability and the fact that smart contracts are involved. Decentralized insurance acts as an operating system for smart contracts.
Decentralized insurance is autonomous. Intermediaries are exempted, and thus no middleman fees. This, in return, makes the use of decentralized insurance a simplified procedure with low costs involved. Further, Decentralized insurance is transparent, immutable, and provides liquidation of crypto-backed assets.
Challenges of Decentralized Insurance
Currently, there exist multiple trading platforms that are especially centralized in nature, which can crowd out and suppress the DeFi.
Further, decentralized insurance allows for traders to trade publicly and which has led to issues around privacy. The autonomous nature of decentralized insurance also means that the users cannot change their information and are thus unable to interact directly and edit their data. This has led to many disputes, and fraudulent cases in the industry, as immutability forms a crucial part of the decentralized system. This may impact the demand for decentralized insurance applications.
Although still at its early stages, decentralized insurance is rapidly growing and holds much promise for the industry. The number of products currently is still small but certainly can grow in leaps in the coming days. It is predicted that just like crypto trading, DeFi and all its applications will soon rule the market and potentially be here to stay for years to come. Decentralized insurance will continue to expand its product range as the market begins to grow. DeFi ‘s openness provides an exciting opportunity to address underserved markets in developing countries. But for now, with DeFi ‘s growth and complete locked value, smart contract insurance is likely to come to the fore in the minds of crypto investors as DeFi implementations continue to add value in the smart contracts underlying it.
Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.
The co-author of this text, Robin Trehan, has a Bachelor’s degree in Economics, a Master’s in International Business and Finance, and an MBA in Electronic Business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.
The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees.
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