The Future of Insurance Includes Blockchains
Crypto use cases aren’t always obvious.
Since the dawn of Bitcoin, seemingly millions of projects ranging from billion-dollar smart contract blockchains like Ethereum to absurd scams like “Squid Game Token” have been competing for the collective brain space of gamblers and seasoned investors alike.
And with the crypto market capitalization hovering around $2 trillion, there is no shortage of liquidity clambering to enter the space.
Some venture capitalists, eager to hop on the blockchain bandwagon during a bull cycle, often seem determined to discover and invest in decentralized alternatives to already existing, successful products. Decentralized Uber sounds cool and is a surefire way to raise capital from LPs, sure, but are there any meaningful benefits to decentralizing a service that’s already massively successful and convenient for both users and employees? Unless that solution turns Uber profitable, likely not.
But, it’s undeniable that blockchain technology makes the decentralization of existing systems easier than ever before. While it’s difficult to see the benefit of decentralization or blockchain in already successful and convenient services like Uber, Airbnb, or Twitter, other services (or products), such as video games, find themselves thrust into a very obvious blockchain use case.
A Blockchain Use Case Example: Gaming
In-game economies have existed for decades, as have in-game currencies. I can remember playing Madden Ultimate Team, grinding endlessly for the in-game currency (Madden Coins) so that I could buy my favorite players on their in-game marketplace. And earning these coins took up hundreds of hours of my time.
If I wanted to “cash out” and sell my coins (for, say, $USD) to somebody who doesn’t want to put the dirty work in to earn them, there was no easy way to do so. Worse yet, I didn’t own any of the players or coins I was working furiously to collect. All that data was connected to an account owned by the same company that created the game — Electronic Arts. If EA decides you shouldn’t have access to the players or coins you (or, in this case, 13-year-old me) worked for, then poof. They are gone and you have no recourse. And when next year's Madden comes out, your old coins or players can’t be sold (for $USD) or transferred, and are essentially lost forever in the ‘old’ version of Madden. Lots of time and money, gone. Year after year after year. Can you tell I’m a little bitter?
Thankfully, blockchain can add 2 things that modern gaming desperately needs: liquidity and self-custody.
Gamers and investors alike have realized that these in-game “coins” can be replaced by crypto tokens, while the specific in-game items (like Madden players) can be replaced by NFTs. Users can then easily cash out and retain full control of their assets. They could be banned from playing the game in question, but they can never be banned from selling, trading, or transferring their NFTs, nor can they be banned from cashing out the in-game token for a USD equivalent or a different cryptocurrency. The items in their crypto wallets (NFTs/in-game currencies) belong to the users and the users alone.
And with that realization came a mountain of both capital and interest. “Play-to-Earn” (P2E) games have exploded in popularity despite their relative infancy to legacy gaming competitors. Electronic Arts called NFTs and P2E gaming “the future of our industry.” Ubisoft has made investments in numerous blockchain gaming and NFT companies. These massive legacy gaming corporations have realized an obvious crypto use case and are adjusting their long-term plans as a result. We could even throw in Facebook’s pivot to Meta and Microsoft’s acquisition of Activision Blizzard as further evidence of that corporate trend, granted that would be a tad conspiratorial.
Where does insurance fit in?
Similar to gaming, there is an industry that could massively benefit from crypto and the technology behind it, but unlike gaming, major corporations and investors have yet to show much interest in an extremely nascent blockchain industry: Decentralized Insurance.
To put it bluntly: insurance is something almost everyone in the world needs for one reason or another, but existing insurance solutions fail consumers at seemingly every opportunity.
The world of insurance has turned into a ridiculously inefficient, frustrating, and costly endeavor for nearly all who participate. When customers most need liquidity and reimbursement, they often wind up fighting in vain against a company whose profits depend on avoiding providing that reimbursement.
This multi-trillion dollar industry can be made more time and cost-efficient, move towards significantly lower operating costs, and become more transparent through the use of blockchain and crypto, and I’m here to explain how.
This article will dive into the technology enabling decentralized insurance, the benefits of decentralized insurance relative to existing insurance solutions, and the active protocols within this emerging industry.
The Technology That Enables Decentralized Insurance
“Imagine the ideal protocol. It would have the most trustworthy third party imaginable — a deity who is on everybody’s side. All the parties would send their inputs to God. God would reliably determine the results and return the outputs. God being the ultimate in confessional discretion, no party would learn anything more about the other parties’ inputs than they could learn from their own inputs and the output.” — Nick Szabo
How Do Blockchains Work?
From Investopedia: “A blockchain is a distributed database that is shared among the nodes of a computer network… The innovation with a blockchain is that it guarantees the fidelity and security of a record of data and generates trust without the need for a trusted third party.”
Unlike a database, the data structure of blockchain creates an irreversible timestamped sequence of data. All transactions and data posted to the blockchain remain there, immutable, forever. The data and transactions written on-chain can be viewed by anyone.
This is the backbone of any decentralized insurance infrastructure. Both those providing and utilizing decentralized insurance products have a trustless way to ensure that all the data and transactions involved actually happen.
Obviously, insurance has significantly more complexity than simply recording and storing data in a trustless, immutable manner. That brings us to the next crucial piece of infrastructure…
How Do Smart Contracts Work?
Smart contracts are self-executing digital contracts on the blockchain that run when predetermined conditions are met.
They follow simple “if/when…then” statements, which are written into code (which is often immutable depending on the parameters of the contract).
From IBM, “They typically are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss. They can also automate a workflow, triggering the next action when conditions are met.”
In the context of decentralized insurance, smart contracts enable disintermediation, peer-to-peer risk pools, and the trustless execution of contractual agreements.
But a problem must be brought to light. While smart contracts could (among other things) automatically execute insurance agreements and payouts, what if the data utilized by these contracts to trigger these payouts was compromised in some way? Could a decentralized insurance protocol defraud its users by manipulating data inputs in order to avoid/reduce claims and payouts?
Oracles — The Data Solution
Blockchains and smart contracts are closed systems. They have no way to communicate with, or know the state of, the outside world.
In order to connect these closed systems to the outside world, an additional piece of infrastructure called an oracle is required.
SmartCon writes that, “An oracle is an external entity that operates on behalf of a smart contract by performing actions not possible or practical by the blockchain itself. This usually involves retrieving and delivering off-chain data to the smart contract to trigger its execution or passing data from the smart contract to an external system to trigger an off-chain event. It can also involve various types of off-chain computations in advanced oracle networks (discussed more below), such as aggregating data from multiple sources or generating a provably fair source of randomness.”
For decentralized insurance to even be possible, a decentralized oracle network must be in place.
Thankfully, that very infrastructure exists.
All the building blocks necessary for decentralized insurance to exist are there. We have transparent and trustless blockchains that allow for the storage of data and transactions in an immutable manner. We have smart contracts which can execute any imaginable agreement within that infrastructure. And we have decentralized oracle networks providing the data needed by these systems in a trustless, transparent, and immutable manner.
That leads us into the really fun part.
The Benefits of Decentralized Insurance
Benefit #1: Disintermediation and the reduction of operations and IT costs
Traditional insurance companies rely heavily on ‘managers’ coordinating a system of employees. Smart contracts can instead act as trustless intermediaries coordinating the system through code. Servicing and policy issuance can also be completely automated within these frameworks. Claims management can be simplified and is able to be crowdsourced (via prediction markets and the tokenization of risk pools).
Relative to a traditional insurance company, the number of people employed within a decentralized insurance protocol is drastically reduced. This enables a significantly more cost-efficient insurance structure.
Nexus Mutual estimates that blockchain technology can reduce premiums for consumers by 18% thanks to disintermediation and the reduction of operations and IT costs.
Benefit #2: The elimination of both counterparty risk and the conflicts of interest within insurance
The infrastructure outlined above makes it impossible for insurance companies (or in this case, protocols) to “cheat” their customers from the payouts promised in the policy.
In the context of parametric insurance, payouts and claims are triggered by predetermined events. Due to the nature of blockchains, smart contracts, and decentralized oracle networks, no single person or entity can alter or dispute the inputs and outputs resulting in payouts and claims.
An example of this in action could be flood insurance. If it rains X amount over Z length of time, trigger Y payout.
In the context of indemnity insurance, things get a bit more tricky.
“Indemnity insurance compensates the beneficiaries of the policies for their actual economic losses, up to the limiting amount of the insurance policy. It generally requires the insured to prove the amount of its loss before it can recover. Recovery is limited to the amount of the provable loss even if the face amount of the policy is higher.”
Proving a loss amount requires appraisers and experts, which are paid by traditional insurance companies, and thus, have a massive conflict of interest. Minimize payouts for their employer, or risk getting let go in favor of a more ‘company friendly’ appraiser.
Still, there are solutions.
From the Etherisc White Paper, “Blockchain can solve this conflict of interest, by enabling truly independent experts (who for example may be publicly ranked by their reputation for efficiency or fairness), and whose work is independent of the insurance provider, as well as being transparent and auditable by the whole community.”
Or, the Nexus Mutual White Paper notes that “crowd-sourcing information and assessing claims using voting mechanics (eg a prediction market)” is an additional solution.
Another potential route is to outsource claims management to a decentralized dispute resolution protocol like Kleros. The benefits of which are explained in detail here.
The open-source development of decentralized insurance protocols can also solve conflicts of interest in another key area: Product Design.
From the Etherisc White Paper, “An insurance company has a big advantage over customers, because they can design products in a way which perhaps unfairly maximizes revenues (sales) and minimizes payouts (expenses).”
“For example if a customer expects a payout from an insurance policy they bought for a particular “event” but the insurance company does not provide the payout because the company maintains that the policy bought doesn’t actually cover that “event”, the customer experience is severely degraded and trust is eroded between consumers and insurance providers.”
Because decentralized insurance protocols will be open source by nature, the ability for protocols to mislead or outright lie to customers over what claims can be made or paid out within their policy is completely eliminated.
Benefit #3: The elimination of information asymmetry
Insurance companies make their decisions based on proprietary data that is held privately and is rarely shared. The reasoning behind the decisions based on this data is nearly impossible for customers to challenge, due to its opaque, closed nature.
Within decentralized insurance, all data and decisions based on data could be validated objectively in a fully transparent manner to all parties involved.
Benefit #4: The democratization of risk pools
The risk pools that exist within traditional insurance are often high-yielding, appealing investments. But, they are not available to the public. Blockchain enables the tokenization of risk associated with risk pools via “Risk Pool Tokens.” This creates a widely available, potentially more liquid way for the risk associated with insurance policies to be priced on the open market.
Benefit #5: Flexible cover periods
Current insurance solutions typically force customers into choosing a year-long cover period. Via decentralized insurance, formulas within smart contracts can calculate any custom cover period needed by a customer.
Benefit #6: Real-time financial reporting
Modern insurance companies typically update investors on their financial health once every 3 months. Thanks to the transparency enabled by blockchains, all investors and participants can have 24/7 knowledge over the fiscal health of their insurance protocol of choice.
Benefit #7: The ability to provide insurance to underserved communities
Billions of those who need insurance are unable to acquire the coverage they need as insurance companies deem it either too inconvenient or simply too expensive to gauge risk and assess claims in certain areas of the world.
Decentralized insurance can help alleviate this problem because of the unique nature of its implementation. Because tokenized risk pools and prediction markets are the most efficient ways to price risk, risks outside of the scope of modern-day insurance can be more accurately assessed. This will allow decentralized insurance to expand into markets centralized insurance is currently unable to serve.
Benefit #8: Insurance for crypto-specific use cases
One only needs to glance at the news to note that decentralized finance carries plenty of risks, whether that be the recent $300 million Wormhole bridge hack or the $80 million exploit on cross-chain collateralization protocol Qubit from January 28th.
These risks are obviously unique to crypto, and I can guarantee standard insurance operators want nothing to do with the risk profile involved with providing coverage for those affected by these exploits.
Decentralized insurance provides a crypto-native coverage option for those taking on crypto-native risks. And with an 8-figure hack happening every week, this is surely one of the most underrated use-cases for this nascent industry.
Examples of crypto-unique insurance policies could include: insurance against stable coins losing their peg, insurance against the smart contract risk associated with certain tokens, protocols, or exchanges, insurance against flash crashes, insurance against oracle (data) failure, and insurance against slashing on proof of stake networks.
Existing Decentralized Insurance Protocols
Disclaimer: None of this is financial advice
Note: A more complete list of all decentralized insurance operators can be found here.
Etherisc
Self-bio: “At Etherisc, we are building a free, open-source, open-access platform for decentralized insurance. This includes a technical protocol and application layers where all service providers in the industry can operate, new and old. These service providers can be anything from insurance companies, insurtech startups, license holders, risk modelers to claim settlement specialists, identity providers and financiers of the back-end reinsurance. The platform enables a wide range of insurance applications: from commercial insurance to non-profit solutions such as mutuals, peer-to-peer insurance, cooperative models and completely new structures.”
Etherisc is a decentralized insurance framework that provides common insurance infrastructure, product templates, oracles, insurance license-as-a-service, and risk pools — allowing anyone to create their own insurance product.
Those wishing to create a product within Etherisc can do so through their Generalized Insurance Framework (GIF), explained in detail here.
Once a product is ready to take in premiums and issue payouts, it must post a stake of the Etherisc $DIP token (ERC-20), in order to assure the quality of its service. Should an insurance provider within the Etherisc framework act maliciously, its stake of $DIP is slashed.
The $DIP token can also be used to pay premiums or services, locked as collateral, locked as a reward, or staked by oracles to ensure the validity of the data provided.
Interestingly, the Etherisc insurance framework is payment agnostic. A protocol within Etherisc could enable payments (premiums and claims) to be made with fiat methods (credit cards and bank accounts), or with cryptocurrencies ($ETH, $DAI, $USDC, $DIP, etc). For products that expand outside the scope of Defi (like flood insurance, for example), fiat onramps are a necessary requirement to achieve mass adoption.
Etherisc also acknowledges the need for more than just a protocol token ($DIP) within its framework.
“While the DIP token is the protocol token for the Decentralized Insurance Platform, separately, we have also proposed different tokens for trading risks to be used on the platform. These tokens would be part of innovative product offerings, organic to specific categories of risks. While some of the regulatory aspects for these tokens need to be worked through, we see these “risk-pool tokens” as an interesting innovation, creating insurance-linked securities for the blockchain age designed to generate profits.”
Current live products include crop insurance for African farmers and flight delay insurance, while hurricane protection, crypto wallet insurance, collateral protection for crypto-backed loans, and social insurance are all either successfully designed or prototyped.
Nexus Mutual
Self-bio: “Nexus Mutual is a decentralised alternative to insurance.
Nexus Mutual uses the power of Ethereum so people can share risk together without the need for an insurance company. Risk assessors (any member who wants to stake) stake on contracts they think are secure. This enables other members to purchase cover on those contracts. Risk assessors are rewarded with 50% of the cover purchase price (divided proportionally between stakers) and get burned if there is a successful claim.”
Legally speaking, Nexus Mutual is technically not insurance, but given a discretionary mutual provides a service nearly identical to insurance (just with a different implementation), they are included in this writing.
“Nexus Mutual does not offer insurance because it is a discretionary mutual. Smart Contract Cover is not a contract of insurance. It is discretionary cover provided by members of the mutual to each other. Members have full discretion on which claims payments are made. Members are putting trust in the economic incentive model rather than an insurance company.”
As opposed to traditional indemnity insurance, which (typically) utilizes either a single or a small number of appraisers to determine if claims should be paid out, Nexus Mutual utilizes community voting mechanics to determine if claims should be paid.
In order to participate in the Mutual, members pay a small fee (0.002 ETH) and undergo KYC so that Nexus Mutual is able to comply with all legal and regulatory requirements. Once that is complete, members are able to purchase covers and participate in claims assessment, risk analysis, and protocol governance using the native $NXM (ERC-20) token.
Nexus Mutual currently only offers coverage for decentralized finance smart contract risks, such as yield tokens, individual Defi protocols, and custodians (centralized exchanges). With further growth, Nexus Mutual plans to expand it’s Defi coverage offering before eventually expanding into insurance areas outside of decentralized finance (like life cover or auto cover).
They have over $400 million in active cover amounts at the time of this writing.
iTrust Finance
Self-bio: “iTrust.finance creates mutually beneficial relationships between stakers and insurance protocols by maximising rewards and growing cover capacity for all participants of the DAO, and the wider DeFi community.”
They aim to increase cover capacity for Defi insurance protocols, optimize users staking rewards, and to simplify the staking process.
iTrust Finance isn’t a decentralized insurance protocol itself, but rather a protocol that aims to make existing decentralized insurance solutions more efficient, similar to how Layer 2 solutions for Ethereum like Optimism or ZkSync aim to increase the efficiency of the Ethereum blockchain.
At launch, iTrust Finance aims to improve the efficiency of Nexus Mutual (described above) and simplify the staking process with the following mechanics:
“While the rewards for being a ‘risk assessor’ and staking against smart contracts are extremely lucrative, they also come with risk. Risk assessor’s tokens will be burned in the event of a successful claim against the contract.
This represents a double dilemma:
DeFi Insurance protocols need a constant supply of capital from ‘Risk Assessors’ in order to scale and offer more cover.
Actually assessing the risk of a smart contract is an incredibly technical pursuit, and even then, anyone can make a mistake in their analysis. This makes ‘Risk Assessing’ unattractive to many would-be stakers.
iTrust.finance solves this problem
On launch, iTrust.finance will offer solutions to both sides of this dilemma. Our easy-to-use risk-managed Vaults will take the headache out of selecting a secure contract to stake against. Initially, $wNXM and $NXM holders will be able to stake into two iTrust Vaults:
Vault A: An index of all the contracts available on Nexus Mutual.
Vault B: A low risk / high rewards Nexus strategy developed by the iTrust.finance DAO.
Currently, $wNXM holders are unable to stake against Nexus Mutual contracts. This means they miss out on staking rewards, and Nexus Mutual misses out on their capital — which could be used to scale and underwrite more cover.
iTrust.finance’s Vaults allow $wNXM holders to stake too — opening up a whole new addressable market for the Mutual, and finally levelling the playing field for $wNXM holders.”
iTrust Finance highlights that because crypto systems are natively open-source, improvements to existing protocols can be made possible because of other protocols.
iTrust Finance appears solely focused on ironing out the inefficiencies within Defi-based decentralized insurance products, with their plans for 2022 including:
“An integration with a new insurer, which will allow us to offer staking pools with two insurers on the iTrust App. Expect an official announcement in Q1 with launch scheduled for Q2
Refactor code where required to allow integration with Nexus V2
Continuing growth in the exchange insurance distribution channel (itrust.insure) by onboarding new platforms
Blue Lagoon staking pool II to launch in January
Opening further staking and LP pools
Launch of our prediction markets
Continued community growth through initiatives like ‘The Admiral’, twitter spaces chats, educational articles and further marketing.”
Unslashed Finance
Self-bio: “Unslashed is a decentralized insurance protocol covering all common risks for crypto assets. Unslashed enables almost instant liquidity to insurance buyers and risk underwriters, ensures constant collateralization, and guarantees transparency through an unbiased claims process. By tokenizing coverage and using “money streaming,” it allows maximum flexibility and freedom: the insured pay as they go and can instantly stop the policy to offload it at any time.
For the insured, you only pay what you use and when you use it. You start and end your cover policy whenever you want, and the premium payments are calculated live. Cool, huh?
For underwriters/Capital Suppliers: you receive the premium payments live as they are streamed to you. You are never locked in a specific policy for an amount of time; we designed our protocol so that you might leave a pool or a bucket whenever you want or have access to liquidity in order to close your position. Sweet taste of freedom!”
Unslashed Finance is able to achieve strong capital efficiency by utilizing “capital buckets” instead of capital pools. While capital pools only provide liquidity for a single policy, capital buckets are “a diverse collection of insurance policies that are carefully designed, assessed, priced and put together for Insurers to underwrite.”
As a result, users providing liquidity to the protocol (in order to pay out claims and earn a yield) are able to diversify their pool exposure so they are not overexposed to an individual risk, and are able to achieve stronger capital efficiency than if they were to invest in all the pools individually. An example of this is their Spartan Bucket.
Asset management is handled by Enzyme Finance, enabling insurers to earn an additional yield from their deposited capital, the further growth of the protocol capital buckets, and a hands-off approach to capital management for Unslashed Finance, as Enzyme Finance is able to handle “lending, AMM pools (eg. Uniswap and Curve pools), staking (eg. Curve LP tokens or just plain ETH), semi-automated farming strategies, leverage and more.”
Interestingly, Unslashed Finance also chose to export their claims management to Kleros. Compared to community voting (like Nexus Mutual), the outsourcing of claims management does have significant advantages (but only if the party handling claims management is sufficiently decentralized), which are outlined here.
Protocol governance is handled using the $USF (ERC-20) token. This enables holders of the Unslashed Finance token to vote on the direction of the protocol as well as specific protocol parameters.
Use cases include insurance against stablecoins losing their pegs, centralized exchange hacks, wallet software and firmware exploits, decentralized exchange hacks, DAPP exploits, slashing, and oracle failures.
Unslashed Finance insures over $500 million in assets with an average return of 24% to capital providers at the time of this writing.
InsurAce Protocol
Self-bio: “InsurAce.io started with an initiative to establish a decentralized protocol that safeguards blockchain users’ activities with insurance-like protection. Inspired by the early pioneers of DeFi insurance platforms and their product designs, we came up with the portfolio-based approach that maximizes value creation for end-users. While existing protocols build their foundations based on capital adequacy and consolidation, InsurAce.io advocates the practice of freeing up limitations in order to realize better capital utilization.
InsurAce.io provides two interoperably functional arms similar to the traditional insurance company: the insurance arm and the investment arm.
The insurance arm maintains reserve pools which maintain the solvency for claim coverage based on risk exposure. The investment arm maintains investment pools that generate carry to subsidize claims and attracts investors with risk appetite. The free capital in the insurance capital pool can be placed into the investment pool to gain a higher yield, while the insurance arm will protect the investment activities. Meanwhile, the investment arm’s yield will complement the premium on the insurance side and reduce the cover cost for customers.
Using the above model, InsurAce.io generates revenue from the insurance premium and carries from the investment returns. The revenues will be used in operation and development costs, token buybacks, community incentives, ecosystem collaborations and more.”
Just like Nexus Mutual, InsurAce is technically a discretionary mutual, but given a discretionary mutual provides a service nearly identical to insurance (just with a different implementation), they are included in this writing.
Risk assessment will be performed by both experts (the InsurAce Advisory Board) and the community, with specific details available here.
Claim assessment is also performed by both the InsurAce Advisory Board and the community. Additional details can be found here.
One of the most unique elements of InsurAce is that they provide cross-chain insurance on the following chains: Ethereum, Solana, Binance Smart Chain (BSC), Polygon, Fantom, Terra, xDai, Arbitrum, Avalanche, Harmony, Moonriver, Celo, Cronos, Boba and ICON. And their application works on the following chains: Ethereum, Binance Smart Chain (BSC), Polygon and Avalanche. This provides users with an untold amount of insurance options for their specific chain of need, while providing those options on cheaper chains (like Polygon, AVAX, or BSC) so that users can save on gas fees.
The additional ability for consumers to bundle covers in order to save on premiums is also noteworthy, if only for its uniqueness.
The native token ($INSUR, ERC-20) is used for governance (claim assessment, proposal voting, etc), mining incentives, ecosystem incentives, and is used to pay out protocol fees to those who participate in governance.
Current products (for which InsurAce is actively providing $72.5 million in covers for) include insurance against smart contract vulnerabilities, stable coins de-pegging, custodian (centralized exchange) risks, and IDO event risks. InsurAce also plans to launch cross-chain bridge insurance, full protocol cover, NFT insurance, rug pull coverage, private key loss cover, exchangable/transferable cover, wallet insurance, insurance marketplace (similar to an OTC marketplace), insurance for the metaverse, and market volatility cover in 2022.
Arbol & dClimate
Self-bio: “Arbol was founded to change the way that individuals and businesses protect themselves from weather risks. We live in an unpredictable and increasingly challenging world. Hurricanes, floods, drought, wildfires spreading across the west coast. Destroying homes, towns, and businesses. Causing billions of dollars in collective damage.
All of these events are increasing in frequency and intensity, causing not just pain and destruction in local communities, but also financial ruin for businesses large and small.
At Arbol, we understand that running a business presents numerous challenges on the road to making and sustaining a profit. Unexpected weather does not have to be one.”
Arbol currently provides parametric weather insurance policies to businesses.
Arbol is technically not a decentralized insurance protocol, but rather a FinTech company offering global climate risk solutions by leveraging smart contracts, blockchains, and decentralized weather data.
Arbol’s data infrastructure was ported into an open blockchain network called dClimate in 2021, which is built on Ethereum. The teams of both Arbol and dClimate overlap heavily, and Arbol was dClimate’s first customer.
dClimate is the world’s first transparent, decentralized ecosystem where climate data, forecasts, and models are standardized, monetized, and distributed.
dClimate creates an open marketplace where all data and forecasts have impartial “skill scores’’ to make it easier for consumers to shop for climate data.
The dClimate marketplace leverages Chainlink’s widely adopted oracle network for retrieving climate data and validating associated skill scores on-chain.
As for implementation…
Arbol’s parametric products are deployed as Ethereum smart contracts. Clients select their triggers, location, and how much they want to be paid if their selected triggers are met when they enter into a transaction. Arbol’s smart contracts automatically trigger when real-world data from the dClimate network indicates that the selected trigger (ex. excess rainfall) has been met during the risk period. Arbol works closely with Chainlink’s decentralized oracle network to secure these smart contracts, which enables real-world, decentralized weather data to be validated and bridged onto the blockchain.
Arbol (being a FinTech company) does not offer a token, but dClimate does. The dClimate token ($WTHR, ERC-20) is used for the governance of the protocol. This includes Chainlink node selection, node payout amounts, core and parameters to run for nodes, etc.
Those wishing to participate in dClimate governance must stake $WTHR tokens. Interestingly, $WTHR is a fixed supply token, so staking rewards do not increase token supply and instead are supplied from an initial reserve.
After the initial supply of reserve tokens is depleted (~12 months from launch), network revenues will be distributed to $WTHR token holders as royalty payments. These payments will initially constitute a small percentage of network revenue, in order to ensure the proper growth of the network. Eventually, 70% of total network revenue will be distributed to $WTHR token holders.
The $WTHR token, and dClimate’s weather data marketplace have not publically launched at the time of this writing.
The hybrid approach of a centralized, forward-facing company (Arbol) to handle standard B2B operations and a decentralized backend (dClimate) to handle data collection, transactions, and settlement is a unique approach that is likely to gain traction in a variety of industries as the implementation of blockchain technology becomes common practice.
Arbol handled $70 million in parametric weather covers in 2021, while dClimate served as the settlement base layer for $250 million in parametric weather risk in 2021.
Final Thoughts
Risks
While I wrote this article to shed light on the enormous potential of this nascent industry, there are still plenty of risks involved with all of these protocols, and with the industry as a whole.
- The regulatory future of decentralized insurance is largely unknown. Future laws could be passed that create massive barriers to entry, or limit growth opportunities for existing players within decentralized insurance.
- Existing decentralized insurance models may prove to either not be practical or not provide enough of an advantage over legacy insurance to draw mass adoption.
- Legacy insurance companies may adopt blockchain technology to save on costs and drown out their decentralized competitors.
- Highly-publicized smart contract exploits lead to public consensus viewing any blockchain product as ‘unsafe’.
- There is currently little demand, market-wide, for decentralized insurance products. Existing protocols face an uphill battle of both attracting demand and educating prospective users on the benefits and risks.
Upside
The total market capitalization of all existing insurance companies is over $2.7 trillion at the time of this writing. Given that existing decentralized insurance solutions possess a collective market capitalization of under $2 billion, it’s reasonable to assume the decentralized insurance market has nowhere to go but up.
We have already seen the majority of traction for decentralized insurance happen within decentralized finance. With decentralized insurance as one of the few options available to hedge against the unique risks in Defi, I would expect the short-term growth of decentralized insurance to be heavily correlated to the growth of Defi itself.
But, in order to achieve mass adoption, decentralized insurance will need to offer more “real world” products, such as life insurance, auto insurance, flood insurance, and eventually, health insurance.
Because claims assessment is far and away the most difficult aspect of insurance in any regard, I would suspect the majority of “real world” decentralized insurance products will be parametric in nature, at least in the short- to mid-term. We already see this with Etherisc’s flight delay insurance, which utilizes a Chainlink oracle to find information on if flights were delayed or canceled, automatically triggering payouts within the policy.
More complex insurance types, such as health insurance, will likely take years, or even decades, to fully mature as decentralized insurance products.
Still, it’s impossible not to get excited about the positive change decentralized insurance can bring to the industry. The potential benefits of decentralization, disintermediation, and transparency are glaring. And they are coming to an industry that desperately needs it. It may just take some time.