The business model of traditional insurance companies cannot meet the needs of DeFi in the short term, and decentralized insurance that is more in line with fundamentalism has become the next big market that DeFi hopes to disrupt.
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Original title: “NexusMutual, a seriously overrated decentralized insurance (IOSG in-depth research)”
Written by: Ray
The traditional insurance industry has a long history of development, and its core modules such as risk control and pricing have mature models, which are lacking in decentralized insurance. This is also destined to focus on smart contract security and financial derivatives at this stage. In the field, it is still too early to “get out of the circle” that many people expect.
In the current hot situation of the entire DeFi market, both the lock-up amount of smart contracts and the market value of DeFi tokens have exploded in a few months, and the security issues such as smart contract risks and code audits that follow have been raised from time to time. And, at this stage, we haven’t seen enough innovation in these tracks. Whether it’s like mutual insurance Nexus Mutual, financial insurance Opyn, or Upshot, which wants to use the prediction market but still has many problems to be solved, it is a continuous attempt in the decentralized insurance industry, blockchain, decentralized finance It is a young product in itself. In the state of market frenzy, we should think about how to deal with the huge risks behind it.
This report will analyze the fundamentals of the Nexus Mutual project and the decentralized insurance industry from the following dimensions:
- What are the problems with traditional insurance?
- Introduction to Nexus Mutual Project
- Nexus Mutual technology highlights
- Nexus Mutual token economy
- Analysis of decentralized insurance industry
- New direction of decentralized insurance industry-prediction market insurance
What are the problems of the traditional insurance industry?
Insurance company agent problem
In the sense of law and economics, insurance is a method of risk management, and its essence is to allocate and transfer the risk of potential losses to a specific entity. Mankind’s natural aversion to natural disasters and accidents has caused primitive insurance ideas and practices to occur in the early days of civilization. People gather together by forming communities and pool resources to share risks, so as not to suffer disasters on their own.
With the development of modern civilization, the embryonic form of a modern insurance system based on the ship mortgage loan system has emerged. This form of borrowing stipulates that the borrower can borrow money from the lender with the ship going to sea as a mortgage. If the ship arrives in port safely, the borrower will repay the principal and interest to the lender; if the ship encounters an unexpected event, the borrower’s debt will be forgiven. The continuous expansion of people’s demand for insurance and the development of modern commerce have given birth to insurance companies specializing in insurance business. Based on strict government supervision and the constraints of a complex legal framework, the insurance industry has experienced long-term development and has spawned many large-scale companies. .
However, in recent years, the outbreak of multiple financial crises has resulted in the loss of confidence and trust in the financial system, and the natural “Agency Problem” of insurance companies has become more prominent. The current challenges facing the insurance industry are mainly manifested in two points:
- The insurance industry is extremely information asymmetry. Insurance companies decide how to manage customers’ funds, including investment methods and payment methods to policyholders. It is difficult for customers to assess the safety of insurance companies;
- After the financial crisis, systemic risks have risen. People no longer believe in the myth of “Too Big To Fail” of large and medium-sized financial institutions. Once an insurance company goes bankrupt, the interests of customers will not be traced and protected.
High “friction cost”
Regarding the above-mentioned “trust” issues between customers and insurance agencies, mainstream solutions are legally binding and prudential, including: defining minimum capital levels, standardizing governance procedures, regularly reviewing and submitting financial reports that meet standards, etc. This centralized supervision method is undoubtedly effective, but it also brings huge additional costs. According to historical statistics, about 35% of the premiums paid by policyholders are given to the “friction cost”, while reducing the industry Flexibility and efficiency.
Blockchain technology proposes an efficient solution for the insurance industry. Smart contracts developed based on blockchain technology not only eliminate the inefficiency of traditional insurance industry management, but also eliminate most of the costs related to governance and supervision. Provide trust in a more cost-effective way (trust has moved from institutions and regulations to transparent code).
Based on the characteristics of blockchain technology and smart contracts that effectively save administrative management, governance and supervision costs, Hugh Karp, the founder of Nexus Mutual and an insurance practitioner for many years, believes that blockchain technology can reduce friction costs in traditional insurance systems by approximately 18 %. In addition, through the use of membership tokens (NXM), blockchain technology can bring insurance ideas back to the original goal of mutual benefit , and consistent incentives will form a community spirit, rather than confrontation between existing individuals and large institutions And unbalanced relationship.
Concerns of Blockchain Institutional Investors
“Decentralized insurance” developed based on blockchain technology and smart contracts can dispel some of the concerns of blockchain institutional investors when making decisions.
For example: When institutional investors consider putting idle funds into Compound-the most basic and lowest-level lending agreement in finance-to earn interest, they will face the following two problems:
- Compliance: If an organization wants to spend this money, how to write compliance documents for the company’s legal affairs is a big problem;
- The DeFi industry lacks a stable and secure insurance business, and institutional investors with abundant cash flow are afraid to enter the market. The existence of decentralized insurance business will greatly increase the number of players entering the DeFi field.
The conservative business model of traditional insurance companies is unlikely to meet market demand and provide services to the DeFi or digital currency industry in the short term. Therefore, the so-called “decentralized insurance” that is more in line with fundamentalism seems to be the next big market that DeFi hopes to disrupt.
Introduction to Nexus Mutual Project
The first product of Nexus Mutual is Smart Contract Cover. This product provides insurance services for the security risks of smart contracts (such as being attacked by hackers) to ensure that the insured can get compensation after financial losses. The user who purchases the Smart Contract Cover (first must be a Nexus Mutual member) choose a fixed amount, namely “Cover Amount”, if the claim is approved through the evaluation process, the amount will be paid.
The security of smart contracts is a well-known issue in the Ethereum community, and a lot of technical work is devoted to improving this situation. But even through formal security verification, there is always a risk of insecurity for a specific smart contract. Nexus Mutual believes that providing further protection for those concerned about the security of smart contracts to prevent the consequences of code errors will bring huge benefits to the Ethereum ecosystem.
In the long run, Nexus Mutual aims to expand its insurance coverage to more life scenarios and become a viable alternative to the traditional insurance industry.
Figure 1: Traditional insurance business model vs Nexus Mutual insurance model, source: Nexus Mutual
Nexus Mutual technology highlights
Decentralized risk assessment mechanism
Nexus Mutual has introduced a “decentralized risk assessment” mechanism, allowing a group of smart contract security audit experts to participate in the assessment of specific risks by pledged tokens, so they can get token rewards from the system. These audit experts are called risk assessors at Nexus Mutual.
The risk assessor declares his personal endorsement of the security of the smart contract by pledge tokens for the smart contract that he feels safe. If this smart contract is insecure and stolen, then, as a punishment, the tokens previously pledged by the risk assessor will be burned.
Figure 2 An example graph of Risk Assessor’s pledge, source: Nexus Mutual Medium
Picture note: The first round: vote in Claim Assessor (the NXM tokens are pledged), if more than 70% of the people reach a consensus, the result will be directly issued, if less than 70%, the second round will be carried out. (If the minimum number of votes is not reached, all members participate in the vote)
The second round: All Nexus Mutual members participate in the voting, and the consensus of the majority is passed directly. (If the minimum number of votes does not reach the result of the first round of majority selection)
Claim assessment
Unlike traditional insurance companies that approve or reject claims based on the terms of the insurance contract, Nexus Mutual decides whether to pay or not through the voting results of its members. Nexus Mutual provides a platform where all people who purchase insurance on the platform will become members. Members on the platform can pledge a portion of NXM tokens to become claim assessors and vote on claims submitted by others. The voting result has the highest decision-making power, which is to decide whether the final compensation will be paid. Nexus Mutual believes that this will enable people who cannot be compensated under the traditional insurance model due to stringent terms, but actually suffered losses, to get their due compensation.
In order for this system to be fully functional, it is necessary to incentivize people to vote on claims, and a severe punishment mechanism is needed to prevent fraud. Nexus Mutual’s approach is to reward tokens to claim evaluators who evaluate the results consistent with consensus voting, and punish those who do not agree with the voting results.
However, if an extreme event occurs, such as a dispute over whether the claim is reasonable and reasonable, the token pledged by the claim assessor will be burned. This situation is unfair and should be avoided. To this end, in addition to the above incentive mechanism, Nexus Mutual will also introduce time windows (Timing windows, an algorithm that is often used to limit current) and human intervention to respond to the occurrence of the above events.
Chart 3 Claim assessment flowchart, source: Nexus Mutual
The first round: voting among the claim assessors, if more than 70% of the people reach a consensus, the result will be directly issued, if less than 70%, the second round will be carried out. (If the minimum number of votes is not reached, all members participate in the vote)
The second round: All Nexus Mutual members participate in the voting, and the consensus of the majority is passed directly. (If the minimum number of votes does not reach the result of the first round of majority selection)
price setting policy
Nexus Mutual considers the following two issues when formulating its pricing mechanism:
- Due to the lack of historical data about smart contracts being hacked, Nexus Mutual uses information about code security to assist in pricing;
- Since it has not been hacked and tested, the insurance cost of a new smart contract will be very expensive (or even impossible to provide) at the beginning. Only after multiple rounds of testing, insurance costs will fall, but this will take a lot of time. Most users cannot stand the long wait and hope to insure their smart contracts immediately. The solution proposed by Nexus Mutual is to introduce a decentralized risk assessment mechanism, and reduce insurance pricing to a reasonable price level by incentivizing risk assessors to endorse the security performance of smart contracts.
Based on the solutions to the above two problems, Nexus Mutual has developed a complete pricing framework.
risk control
Nexus Mutual important design aspects of risk control is the capacity limit (Capacity Limits), namely: smart similar categories in the proportion of contract funding pool will set a fixed upper limit, avoid extreme special circumstances, a certain type of collective intelligence contract The claim event affects the ability of the entire fund pool to pay. The essence of economics can be understood as: diversify the risk of the fund pool through the diversified combination of smart contracts.
Nexus Mutual token economy
In terms of conceptual design, Nexus Mutual’s shared capital pool is very similar to Uniswap:
- Nexus Mutual members provide liquidity (in ETH) for the fund pool and receive NXM tokens in return. Similarly, Uniswap’s liquidity provider contributes ETH and other asset pairs to the liquidity pool and receives corresponding tokens in return;
- The surplus from the purchase of smart insurance contracts by Nexus Mutual members will be kept in the fund pool and shared by NXM token holders. Similarly, Uniswap liquidity providers earn fees from transactions, and a small amount of fees charged by traders for transactions in the liquidity pool is shared by liquidity token holders.
Figure 4 Schematic diagram of Capital Pool, source: Medium
Although the two models of Nexus Mutual and Uniswap have similarities from the basic model, Nexus Mutual adds some other elements to this shared capital pool:
- The final remaining premium of the Smart Contract Cover Smart Contract Cover is estimated to be a surplus of 30%. This value is only an expected value, and the actual claim amount may be larger or smaller than the project party estimated. But no matter how it changes, all Nexus Mutual members will share the risk;
- When a Nexus Mutual member purchases an insurance policy, he needs to use NXM tokens. 90% of the NXM tokens paid will be burned by the system, and the remaining 10% will be locked for a certain period of time (insurance period + additional 35 days) ) In order to carry out the claim assessment procedure, the purpose of which is to prevent the insured from submitting claims recklessly. In addition, the system will mint new tokens as a reward for claim evaluation and participation in governance activities.
Analysis of decentralized insurance industry
Currently in the decentralized insurance industry, in addition to Nexus Mutual, other decentralized insurance projects also include: Upshot, Etherisc, CDx, Convexity, VouchForMe, Augur. But since their models are different, we will sort out the entire industry.
Figure 5 Segmented areas of the decentralized insurance industry, source: IOSG
Analysis of Decentralized Insurance Segmentation
According to Figure 5, we divide the decentralized insurance industry into sub-sectors: shared capital pool (Nexus Mutual), prediction market (Augur), financial derivatives (Convexity), decentralized insurance agreement (Etherisc), There are five categories of social proof endorsement insurance (VouchForMe). Among them, it is particularly noteworthy that the Upshot project, which combines a shared capital pool and a prediction market, aims to launch a better insurance solution than Nexus Mutual and Augur.
Risk pool
Nexus Mutual uses a risk-sharing model. It has a risk-sharing pool. This pool of funds is governed by community members holding NXM tokens. The community will vote to determine which claim is valid. Nexus Mutual initially provided smart contract insurance, allowing anyone to purchase any insurance based on Ethereum smart contracts. This means that DeFi users can now purchase insurance to protect the funds lent on Compound or Dharma and the digital currency stored in Uniswap. After that, Nexus Mutual also hopes to provide more blockchain and traditional insurance products in addition to smart contract insurance.
Prediction market
In addition to insurance native agreements, and financial product models such as derivative transactions and option agreements, prediction markets can actually be used as an insurance mechanism. For example, on Augur, you can hedge the risks you may be exposed to by building a prediction market, but this mode requires you to have enough people willing to participate in the prediction market to bet.
Decentralized insurance agreement
Etherisc’s idea is very similar to Aragon in the DAO field-first build a general decentralized insurance application platform so that developers can use this platform to quickly develop new insurance products.
The Etherisc core team has developed some insurance common infrastructure, product templates and insurance licensing as a service, allowing anyone to create their own insurance products. At present, the Etherisc community has designed a set of basic insurance products, ranging from flight delay insurance and hurricane insurance to crypto wallet and loan mortgage insurance.
Social proof endorsement insurance
VouchForMe’s idea can be seen from the product name, they hope to use social networks to reduce the cost of insurance. Your family and friends know you better than others and understand your risks better. VouchForMe hopes to collect guarantors from social networks and social relationships who are willing to endorse you, and let the insurance company believe that you meet Requirements, thereby reducing the cost of insurance. When guaranteeing, you need to sign a financial undertaking linked to the insurance claim. The more people who guarantee you, the lower the premium. If there is a claim, the guarantor will bear it in a certain proportion.
Financial derivatives
There are two representative projects in the direction of using financial derivatives as DeFi insurance: CDx and Convexity.
CDx
CDx is a tokenized insurance trading platform, and its essence is a credit default swap agreement. The credit default swap contract is the most common credit derivative product in the foreign bond market. It refers to a contract in which the buyer and the seller perform risk conversion on a specified credit event within a certain period of time. The buyer of the contract pays the contract seller for the credit event of a reference entity during the contract period or before the credit event, in exchange for payment after the credit event.
The risk conversion contract on CDx is called Swap. Sellers can mint a token corresponding to the Swap type. Swap sellers need to set the total amount of assets they need to insure and the amount of compensation they want to receive; buyers can decide whether to buy through the terms of the swap. Swap contracts on CDx are matched by service providers and finally traded on the chain. In addition, the Swap contract itself can also be traded in the secondary market like ordinary tokens. If there is a breach of contract, the holder of Swap can redeem the corresponding compensation payment through Swap.
Convexity
Convexity Protocol (OPYN product) is an option protocol based on ERC20 homogenized tokens. In this OPYN, oTokens (option token) can be used as an insurance tool, and its operating mechanism is close to financial derivatives and option transactions. With this product, users can protect their assets by purchasing put options.
Let’s take a simple example to illustrate how put options provide asset protection for their holders: Xiaoming is not optimistic about company A’s stock and is expected to fall in the next month, so he bought it from Xiaohong by paying an option fee of 1 yuan A put option. The two parties agreed: One month later, Xiao Ming has the right (but not the obligation) to sell a share of Company A to Xiaohong at a price of 20 yuan. One month later, if company A’s stock drops to 10 yuan, Xiao Ming will choose to execute the option contract, buy company A’s stock in the market for 10 yuan, and immediately sell it to Xiaohong for 20 yuan, earning 10 Yuan price difference. Regardless of the time cost, Xiao Ming can still earn a net income of 9 yuan after deducting the 1 yuan option fee paid a month ago; if the stock of company A rises to 40 yuan a month later, Xiao Ming feels that the execution of the option contract is not good for him, so he can choose The contract is not executed. At this time, Xiao Ming’s net loss was 1 yuan when he purchased the option. At the same time, Xiao Ming also enjoyed the gains from the stock price gain and was compensated. Xiao Ming obtained a kind of insurance protection in disguised form by purchasing put options, that is, a certain net income can still be guaranteed when stocks fall. For the option seller-Xiaohong, he can get a sum (1 yuan) of option fees paid by Xiaoming at the initial stage of the contract.
What Convexity Protocol wants to do is to replicate the put option products in traditional finance to the DeFi field, and provide option sellers (Xiaohong) with more flexible choices and reduce restrictions. People can cast an ETH oToken by staking Ethereum ETH, and this oToken represents a put option on Ethereum. The option buyer (Xiao Ming) can choose to buy oToken to obtain insurance against ETH plummeting. The option seller (Xiaohong) obtains a certain option fee by collateralizing his own ETH to sell options.
Comparison of insurance solutions in the DeFi field
The following opinions and content come from our conference call with Nexus Mutual founder Hugh Karp, the conference call with Upshot founder Nick Emmons, and the “Comparing Insurance Like Solutions in DeFi” written by Hugh Karp himself on November 15th. Organize and summarize.
The most mainstream solutions for current decentralized insurance are: Common Capital Pool/Insurance Pool, Prediction Market, and Financial Derivative. These three models are like decentralization. Projects such as Ethersic, an insurance protocol, focus on providing a platform at the protocol layer to facilitate insurance developers, so this article does not directly compare Ethersic with the above three directions (all concentrated and application layer) for the time being.
According to Hugh Karp, risk-sharing capital pools, prediction markets, and financial derivatives all have their own advantages and disadvantages, so how to use their own characteristics to launch products that meet the needs of users is the most important. Then we can compare the three types of products from the following dimensions: Capital Pool & Liquidity, Flexibility, Claim Assessment & Oracle, Risk Assessment and Insurance pricing (Risk Assessment & Pricing).
Dimension 1: Capital pool and liquidity-capital efficiency
Comparing decentralized insurance projects will inevitably not avoid the topic of “risk-sharing capital pool”. The risk-sharing fund pool can diversify risks while also allowing participants in the fund pool (that is, policyholders) without complete mortgage. For a simple example, if an insured person wants to make an insurance for 200 Ethereum in his smart contract, then he/she only needs to contribute 1.06 Ethereum to the fund pool without actually going to Pledge 200 Ethereum in it.
In comparison, in the forecast market and financial derivatives, 100% of the collateral funds are required to make compensation. Especially when there is a very low probability of occurrence of a risk, such as a 1% probability per year, then it is obvious that in this case, it is more efficient for the customer to use 100% of the funds for a long-term mortgage for a risk with a very low probability of occurrence. Low. The risk-sharing fund pool model is much lower than the cost of capital for forecasting markets and financial derivatives.
In terms of liquidity, Hugh Karp believes that risk-sharing capital pools can provide liquidity for various types of risks faster (because as long as a capital pool is formed, various types of risks can be covered). In contrast, prediction markets and financial derivatives are much worse in this respect, because their characteristics that require the participation of buyers and sellers make every insurance need to look for liquidity (look for counterparties).
Dimension 2: Flexibility
In terms of the flexibility of constructing new products, the innovation speed of the prediction market and financial derivatives in insurance contracts is faster than the risk-sharing fund pool. The reason is that before forming a risk-sharing fund pool, a lot of research work needs to be done in pricing and underwriting to ensure that the fund pool has sufficient capacity to bear risks (simply speaking, it has sufficient ability to make claims).
Dimension 3: Claim assessment and oracle
In terms of claims evaluation, Nexus Mutual uses community members to vote and does not involve oracles. According to Hugh Karp’s explanation, the reason why the oracle is not needed is because of the assessment of claims for smart contracts, all information about smart contracts is open and transparent on the chain.
Another project we are concerned about, the prediction market project Upshot uses oracles in claim evaluation, but Upshot does not find external information sources for oracles, but has designed a set of “reputation ranking” mechanisms for the Upshot platform The oracles participating in the claim evaluation (that is, the claim evaluator) do the reputation ranking. According to Upshot’s design, policyholders will tend to use high-ranking predictors to evaluate claims. In this design, Nick Emmons of Upshot believes that Nexus Mutual’s voting mechanism for deciding whether to claim is flawed.
However, financial derivatives have no oracle, and users directly use the pre-determined price to pay when they exchange for put call options. This is an advantage of financial derivatives as an insurance method.
Dimension 4: Risk assessment and insurance pricing
For risk assessment and insurance pricing, Nexus Mutual uses a method of letting community members pledge tokens to assess the security risk of smart contracts (judge the probability of being hijacked by hackers). The specific method for risk assessment of smart contracts is to run multiple hackers. Attack test, run multiple attack tests on a smart contract to provide policyholders with a low price for insurance (for example: I want to open a smart contract insurance at Nexus Mutual, then before the contract takes effect, the Nexus Mutual platform The risk assessor on the above will conduct attack tests and security tests on my smart contract, and it will take effect after ensuring that the security of my smart contract reaches the target. Of course, it is impossible to do multiple attacks on every smart contract. Testing, for smart contracts similar to those previously evaluated on the platform, according to Hugh Karp, there is no need for multiple tedious attack tests)
So for projects in the prediction market, such as Augur, Upshot, assuming that the probability of an event being hijacked by a hacker is 1%, then if you want to bear the other side of this bet (that is, the counterparty of the insured person), then insure The maximum amount that a person’s counterparty can earn is 1% of the insured amount, but at the same time the counterparty must lock in all potential claims (full mortgage) at the beginning. If this event does happen, the insured’s counterparty will lose Drop the funds locked at the beginning, and the lost funds will be used as compensation for the policyholder. In the prediction market, it is the market that does risk assessment and insurance pricing. For events with a very low probability of occurrence, it is clear that the cost of capital of the policyholder’s counterparty is high. Another issue worth considering is that in forecasting Whether the market can find enough counterparties willing to take on my insurance risk is also a question.
Figure 6 Insurance pool vs. financial derivatives vs. forecast market, source: Hugh Karp
The new direction of decentralized insurance industry-prediction market insurance
Many people care about the advantages of decentralized insurance compared to traditional insurance. In order to understand what problems decentralized insurance can solve, we must first understand the pain points of the traditional insurance industry:
Risk assessment is costly
Risk assessment usually includes two parts: data integration + data processing (this is usually the job of an insurance actuary). For a centralized entity (traditional insurance company), it is costly to complete data integration, processing, and to ensure the accuracy of risk assessment (because the data source is centralized, the acquisition cost is high).
Centralized and opaque verification of insurance claims
Claim verification is only allowed by a small number of people or institutions in the traditional insurance industry. If it can be decentralized and use better incentives to allow more people (or even anyone) to participate in claim verification, it will be great Reducing the cost of insurance companies and customers can also bring more diversified insurance products.
The coordination of the three core modules of insurance is difficult
The three core modules of the insurance industry include: actuarial, solvency, and claims. For a centralized entity (insurance company), it is not easy to coordinate these three resources at the same time, and it also brings high costs. According to statistics, more than 50% of insurance costs in the traditional insurance industry come from this. There are new directions (such as the insurance project Upshot on Near) that want to replace the traditional insurance field with the model of the prediction market, but we believe that this kind of program will be more difficult in actual implementation. The difficulty is that the prediction market is difficult to identify the insurance Do a risk assessment based on personal information (including: applicant’s history, credit history, etc.).
In response to the above three pain points, Nexus Mutual and Upshot both tried to use blockchain technology and decentralized governance to solve them, but there are still problems:
Claim Assessment (Claim Assessment)
Regarding the claim evaluation, Nexus Mutual uses community members to pledge native tokens (NXM) and then vote on the claim submission to decide whether to pay the insured person or not; while Upshot tries to use a decentralized oracle network. Play the role of the claim assessor (Claim Assessor) to complete the assessment work. Upshot is designed to allow anyone who wants to do the claim assessment work to participate, but theoretically you need to equip yourself with an oracle, and the information source of the oracle (that is, who is your oracle’s information provider) Regardless of the Upshot platform, there will be a reputation ranking list on the oracle on the Upshot platform. Upshot wants to constrain oracles in this way.
For DeFi products, or in simple terms, the policyholder opens an insurance for his smart contract on the Maker, Compound, Uniswap platform (considering that the smart contract will be hijacked by hackers and cause economic losses), then the state of the smart contract Information is actually on-chain (that is, on-chain information), and the necessity of the oracle as a channel to obtain off-chain information is actually not enough here.
Risk Assessment & Pricing (Risk Assessment & Pricing)
Since Upshot wants to do insurance in the prediction market, risk assessment & insurance pricing becomes what the market needs to complete. To put it simply, behind the use of prediction markets to complete the work of risk assessment is the belief in the power of “group wisdom”. The broad masses in the market will accomplish this. If an insurance applicant wants to initiate a “self-smart contract” Whether it will be stolen” event contract, then the counterparty of the policyholder will conduct a risk assessment to determine the probability of the event.
Collateral issues of counterparties
It is a small probability event for a smart contract to be hijacked by a hacker. If we say that the probability is 1%, then the insurance premium (Insurance Premium) that the policyholder needs to pay is if the hack event does not occur within the agreed time If it is owned by the counterparty), it is certainly not much, but in order to obtain this premium, the counterparty must be fully-collateralized, that is, the amount of insurance of the insured must be equal to the counterparty. The amount of assets, although the counterparty can be composed of n individuals, everyone can share this part of the mortgage assets, but it still cannot change the fact that capital efficiency is very low.
Conclusion
Traditional financial investors’ concerns about the lack of a stable and secure insurance business in the DeFi field have become one of the important reasons why they dare not enter the market. Due to the high volatility of digital asset prices and the security of smart contracts, traditional insurance companies’ conservative business models make them unlikely to meet market demand in the short term to provide services to the DeFi or digital currency industry. Therefore, decentralized insurance such as Nexus Mutual and OPYN became the first to eat crabs.
Although blockchain technology and smart contracts can theoretically eliminate the inefficiency of traditional insurance industry management and most of the high costs related to governance and supervision. However, the design of insurance pricing, risk assessment, and ex post compensation is still early. The core risk lies in the possibility of using community voting for compensation evaluation (but at the same time voters are stakeholders in the fund pool). In addition, in addition to the risk of smart contracts being attacked, some real-world insurance categories are also difficult to completely replace with decentralized products (because it involves a large number of policyholder evaluations, guarantee risk evaluations, product pricing, etc.). Although Upshot I want to use the way of predicting the market to use group intelligence to solve these things, but it is too ideal to actually land.
Therefore, in a comprehensive way, although the track of decentralized insurance is valuable, it must be viewed dialectically to understand which problems can be solved and which cannot be solved at present.
Source link: mp.weixin.qq.com
