Blockchain Vocab Every Insurance Professional Will Know: Risk and Insurance
Patrick Schmid, PhD, MA, is Vice President of The Institute’s RiskStream Collaborative®. He previously headed The Institute’s Enterprise Research Department; served as director of research for the Insurance Research Council (IRC), a division of The Institutes; and worked as an economist for Moody’s Analytics. Schmid has taught economics and finance at colleges and universities in Philadelphia.
Blockchain technology is beginning to change the insurance business, helping the industry overcome some of its challenges. The use of various blockchain technologies within the business world, including in the insurance industry, varies after its inception.
Cryptocurrency, like Bitcoin, has been around for more than a decade, but institutions (including insurance companies) are now starting to hold it as a hedge against inflation.
Enterprise blockchain, where a private peer-to-peer blockchain network is leveraged to share data and improve business processes from multiple parties, was launched just over half a decade ago and is just now showing signs of moving towards production in insurance.
Newer uses of blockchain technology—such as decentralized finance, non-fungible tokens, and decentralized autonomous organizations—are short-term for the industry.
Each of these blockchain technologies will play a role in redefining the insurance industry in the years to come.
For industry professionals, and for anyone else looking at these technologies, it’s important to understand exactly what we’re working with. Below is a list of some key terms used in this area.
Blockchain
A distributed ledger that maintains a continuously growing list of chronologically added records called “blocks”. In most blockchains, new blocks and the data in them (transactions, smart contracts, and so on) are confirmed and verified through a decentralized consensus. This verification process removes intermediary validation and establishes trust without the use of a centralized authority.
Cryptocurrency
A digital currency in which encryption techniques are used to regulate the generation of currency units and verify the transfer of funds, operating independently of a central bank.
Decentralized Applications (dApps)
Digital applications or programs that exist and run on a blockchain or peer-to-peer network of computers rather than a single computer. dApps (also called “dapps”) are beyond the reach and control of a single authority.
Decentralized autonomous organization
An organization that is run through smart contracts and maintains financial records and program rules on a blockchain.
Decentralized Finance (DeFi)
A system where financial products become available on a public blockchain network.
Enterprise Blockchain
A type of private permissioned blockchain that can be used to streamline business processes at scale. Enterprise blockchain technology helps achieve coherent, efficient and secure ways of doing business.
Gartner’s hype cycle
A graphic depiction of a common pattern that occurs with each new technology or other innovation. The five phases of the Hype cycle are: technology trigger, peak of inflated expectations, trough of disillusionment, slope of awareness and plateau of productivity.
Non-Fungible Token (NFT)
A unique and non-interchangeable unit of data stored on a blockchain. NFTs can be associated with reproducible digital files such as images, videos and audio. &
