Decentralized Insurance Built on the Blockchain is a Game Changer

Decentralized insurance built on a transparent, lightning-fast and efficient blockchain with the community in mind is something to think about, says Adam Hofmann, CEO of Nimble.

Let’s face it – crypto, Web3, blockchain, whatever you want to call it – is growing fast. As a result, there are concerns and skepticism about the volatility and safety of digital assets, including investor funds. Would you put your hard earned money in anything without some sense of security?

If we’re going to be honest with each other, and we absolutely should be, it’s perfectly logical that companies are skeptical about putting a lot of money into a decentralized system.

Both in the rapidly developing DeFi space and the “Normalverse” there is always a risk of hacks or exploits. Enter: decentralized insurance.

“There have been countless cases of hacking of smart contracts, cyber attacks on exchange platforms, etc. that have caused huge loss of investor funds,” says Blockchain Simplified on Medium. “Even the magnanimous DAO could not prevent a malware attack on the platform that resulted in the loss of billions. Decentralized insurance has many applications that can help prevent such consequences from occurring.”

DeFi insurance

We can work together to build these preventative use cases. Let’s rethink the traditional insurance cycle for the DeFi world:

When a policyholder purchases decentralized digital asset coverage, they willingly participate in the protection of their participation on the blockchain. The purchase of insurance comes from a “pool” that has been subsidized by what are traditionally known as insurance providers.

In DeFi parlance, these “insurance providers” are more appropriately liquidity providers (LPs), or insurance liquidity providers. These LPs can be any company or individual who locks their capital in a decentralized risk pool with other similar providers. Coverage can range from digital assets and smart contract risk coverage to protecting NFTs, DAO governance and wallets – and as far and wide as you can imagine.

Now let’s go one step beyond that. This policyholder has purchased coverage for their participation in another DeFi project. They have decided to participate in the ABC Project by providing security, but have purchased insurance coverage in case there is a hack or vulnerability with ABC’s smart contracts. Not only have they protected their “stake” in that risk, but they have effectively removed that risk from the ABC project.

What does this mean? It means that a risk pool built on community allows the users, the project and the LPs to all work towards a common call for safety and security. ABC Project may subsidize the premiums or the risk group to motivate users to purchase insurance. By doing so, users can purchase cost-effective insurance coverage. This means that LPs have a steady stream of prizes. Ultimately, the overall risk for ABC has been diversified – and the whole process is more efficient.

Decentralized Insurance: Efficiency

The efficiency comes from the community approach that decentralized insurance allows. In the Normalverse, if a business causes you damage, you usually seek compensation from the insurance policy.

That means you wait for them to respond, wait for the insurance company to investigate, negotiate with the insurance company, and in some cases the flow of claim payments comes through that business. This only causes a little heartburn for the offended party. What we don’t often think about is the heartburn it causes the business too.

Consider a ridiculously optimistic statement that “most businesses value their customers.” Or, if you’re a little more pessimistic: companies realize that in order to drive profits, they need to keep customers happy.

In the claims scenario outlined above, the pressure is on to push the insurance company to respond quickly to the business. The pressure to communicate with their customers takes hours upon hours. The loss of income and reputation in the meantime can be irreparable. All of this feeds a vicious circle where claimants often fight with companies who fight with insurance companies who fight with claimants who fight with… you get the idea.

Incentive loop

A decentralized insurance model instead feeds an incentive loop. The business can remove the friction and time spent during injuries by working with their users (a new concept) to ensure that requirements flow directly to them without intermediaries. This frees up the company’s time for PR and creates a smooth “disaster plan”. On top of that, it transfers a lot of the risk off their plate. See? An actual incentive loop.

This is not the only reason why a decentralized community is beneficial for decentralized insurance. The traditional insurance industry is worth more than $5 trillion and often puts profit over people, or at least has the perception of putting profit over people.

Building the insurance system on the chain means you work with like-minded people. Incentive loop! Traditional, centralized insurance companies often have efficiency issues stemming from multiple supervisor sign-offs, lengthy process, etc., which can create delays of days or weeks to process payments and claims.

Days and weeks can mean a dramatic change in the value of your digital asset. Time and efficiency are essential. I will leave the static values ​​of traditional insurance, predatory claims practices, and opaque propaganda for another time.

Decentralized insurance benefits

Research published in SAGE Open talks about the benefits of blockchain-based insurance: “The insurance sector can benefit from the use of blockchain technology where operations span multiple countries and have many actors including the end user,” the authors wrote.

“The insurance industry can be connected via a decentralized network where the transactions are recorded across distributed ledgers. The trust in transactions can be given by the blockchain members through consensus, thus eliminating the need for third parties. Contracts and insurance policies can be registered electronically as smart contracts with a set of rules for the terms, conditions, duration of the policy, etc.

Theoretically, decentralized insurance providers like Nimble on the Algorand network allow for less bias from claims assessors, underwriters and actuaries, a more efficient business process and less deterrent loop; all while creating cost-effective and profitable risk models.

A decentralized approach to digital asset insurance is about community. Everyone benefits from the actions of others in society, everyone has a transparent view of the system and process, and everyone works towards profitability because everyone gets a share of the insurance profits.

Proceeding

Of course, there are risks in the decentralized world of insurance. We can’t bubble-wrap ourselves in boring plastic blockchain protection and launch ourselves into the metaverse without risk. It’s not possible and that’s not how life works.

It is important that there are enough policyholders buying coverage, enough capital provided by LPs, and enough education to help the community understand how they work together.

We also need to work with established insurers to help them understand that building decentralized insurance processes does not mean a bankrupt insurance industry, but instead a new way forward where all members of the process are treated fairly and equitably.

You can guess what I’m about to say: “Incentive loop.”

The reality is that even in a utopian traditional insurance world where insurers are empathetic to their customers’ needs, everything goes as planned and the birds sing throughout the process – legacy technologies in the insurance industry will not work effectively as we move forward.

A decentralized insurance system with traditional insurance risk models, estimates and insurance data built on a transparent, lightning-fast and efficient blockchain with the community in mind – well, it’s a game changer.

About the author

Adam Hofmann is the founder and CEO of Nimble, a global decentralized insurance company that builds and deploys Web3.0 and blockchain tools and technology to power the community-centric future of efficient and fair insurance processes. He is based in Massachusetts.

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