Question of centralization faces growing crypto insurance industry

Cryptocurrency markets have been maturing in recent years, making the demand for cryptocurrency insurance solutions greater as more advanced players dive their toes into the nascent ecosystem.

Investopedia reports that cryptocurrency is seen as a “great opportunity”, with a spokesman for one of the world’s largest insurers, Allianz, saying the company has explored product options and coverage in the cryptocurrency space as it becomes “more relevant,” important and prevalent in the real economy. “

The cryptocurrency ecosystem is still seen as dangerous and volatile, where funds are not completely safe even in major cryptocurrency exchanges. Although some platforms, including Coinbase, have revealed that they have hot portfolio coverage through specific insurers, most do not publicly promote whether the assets deposited there are insured.

The industry presents specific challenges for insurers. On the one hand, premiums are often defined with the use of historical data, which in the cryptocurrency industry are scarce at best and absent in younger areas, including non-fungible tokens (NFTs).

However, the demand for space insurance is present, as crypto exchange has expanded its insurance program to cover $ 750 million in 2021 and decentralized solutions have been created based on decentralized autonomous organizations (DAOs) such as Nexus Mutual.

Speaking to Cointelegraph, Tony Lees, product director at Wirex digital payment platform, said one of the key blockers to “genuine conventional adoption in recent years” was the thought that the cryptocurrency space is “unreliable and insecure.”

For Lees, most users feel that their funds are unsecured and that investing in cryptocurrency assets is riskier than investing in the traditional stock market. Compliance with industry standards and other regulations, Lees added, has helped platforms show how secure users’ funds are. Lees said:

“Corporate-level insurance coverage with stewardship platforms like Fireblocks has allowed companies like Wirex to demonstrate robust systems and controls to give the user peace of mind.”

Michael Vogel, CEO of Coinstream and founder of the Canadian cryptocurrency exchange Netcoins, echoed Lees’ thoughts, telling Cointelegraph that cryptocurrency represents a “very different risk paradigm” to which investors are accustomed, as no consumer cares “for his actions in Tesla.” missing in an online brokerage account “.

Many users, Vogel said, are not comfortable with the responsibility of managing the security of their currencies themselves. As a result, the market has developed “custody-type solutions, where a trusted company acts as a form of cryptocurrency.”

Insurers could provide clear guidelines that custodians must follow to qualify for insurance here, he said. The move could provide familiarity to space investors. As Lees said, most know the Financial Services Compensation Plan of up to $ 104,000, or £ 85,000 in the UK, or Federal Deposit Insurance Corporation coverage of up to $ 100,000 in the US.

These schemes, Lees said, help investors feel comfortable leaving their funds in the banks. Cryptographic insurance that covers user participation on a centralized platform would provide “that traditional, family-friendly coverage against hacking or cyberattacks.”

Centralized entities like Allianz entering space would only further support the notion of familiarity. Johnny Lyu, CEO of the KuCoin cryptocurrency exchange, told Cointelegraph that while the cryptocurrency ecosystem needs insurance, in its early stages of development most of the participation will come from centralized institutions.

As the industry develops, Lyu said decentralized alternatives are gradually improving. Whether these platforms can be truly decentralized, he said, “will depend on the development and improvement of the cryptographic environment in general.” At the moment, both centralized and decentralized entities have challenges to overcome.

1796 Fire Insurance Contract.

Confidence to operate with crypto

Overcoming these challenges could give more investors the confidence to invest in cryptocurrencies and gain exposure to the fledgling asset class.

According to Vogel, fraud is a major challenge for insurers in the cryptocurrency space. Using home insurance as an example, Vogel noted that the “tangible benefit of insurance is that your home can be rebuilt if it burns down.” The net result, he said, is that in the end, people will still have a home.

On the other hand, obstruction in the blockchain could lead to specific types of fraud. Vogel added:

“A crypto-insurance fraudster could submerge, hide or obscure their coins plus an insurance payment.”

For Lees, the biggest challenge the cryptocurrency industry has faced so far is “providing traditional services to a new unknown sector, especially when it comes to technology.” Lees echoed Vogel’s sentiment, saying funds that are difficult to track down in the blockchain “have created a nervousness for insurance companies.”

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In recent years, he added, solid Know Your Customer (KYC) checks have been “key to cryptocurrency providers,” whose work with blockchain forensic companies such as Chainalysis and Elliptic has meant that “transactions between cryptocurrencies have been very easier to track. ”

Lees now hopes that the overall risks within the industry will be further reduced, which ensures that “it is much easier for insurers to understand and underwrite.” Ultimately, he said, insurers “will play an important role in realizing a fully digital economy in the future, giving consumers and businesses the confidence to operate in space.”

This kind of trust would, at first, come from centralized players in the insurance space, as decentralized solutions are not yet widespread and may need to be further improved before entering the market.

Risks of smart contracts

Decentralized insurance solutions have been active in recent months. Popular decentralized insurance provider Nexus Mutual, for example, currently covers more than $ 400 million in Ether (ETH) in several projects, while rival protocol InsurAce claims to have covered more than $ 340 million.

Speaking to Cointelegraph, Lior Lamesh, CEO and co-founder of blockchain security company GK8, said the cryptographic ecosystem needs security for decentralized protocols and end users. Wile Lamesh noted that “automatic and decentralized insurance tools could be useful,” he suggested, adding that they themselves may need insurance.

As decentralized insurance tools are part of the protocol layer and rely on smart contracts, which could fail through human error, they could have “open vulnerabilities for hackers to exploit.”

Lamesh suggested that a possible glitch could be in the protocol that covers its own glitch after it causes losses to users, “which is a lucrative selling point for potential users.” Add:

“Hypothetically, we could still end up in a loop of smart contracts that insure other smart contracts, but I would expect centralized insurers to probably get involved at some point.”

As a result, the CEO of cryptography expects more centralized insurers to enter the market as they better understand blockchain technology and stay ahead “while decentralized insurance solutions will likely take time to evolve and discover the best approaches for the industry.

He added that at present, hacking in the space of decentralized finance (DeFi) occurs “every week, if not every day” and, as such, it is difficult for decentralized insurance protocols to work, as these protocols can become lucrative targets. for hackers.

Once the industry matures, he said, decentralized insurance will “take off.”

A growing industry

The cryptocurrency insurance industry has grown over time. For Lamesh, his current challenge is for experts to “wrap their heads around the technology involved,” as the blockchain “can be confusing enough for its own people with no computer skills.”

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Encryption insurance deals with DeFi protocols, which require “a lot of expertise.” Lamesh noted, however, that the cryptocurrency insurance industry may have a bright future ahead, saying:

“The future may be dazzling, of course, with the blockchain entering mainstream security and decentralized protocols touching on AI-driven data oracles to provide us with customized insurance plans and packages for everything we need.”

Lees noted that the cryptocurrency insurance industry has “consolidated in the last 12-18 months,” with traditional companies entering the space and offering coverage on “certain digital assets based on how they are stored and the compliance levels of portfolio providers.”

As the crypto industry as a whole grows, Lees said, “you can only see that the cryptographic insurance industry is following suit, given the large volume of new cryptographic portfolios that open each month.” For Lees, the standards that crypto-companies meet will have a “traditional feel, giving insurers the peace of mind that they can take out stakes.”

The challenges facing cryptographic insurers could be a major source of revenue for the insurance industry, as centralized providers may switch to products that exclude specific types of common risks in space, such as hacking or smart contract failures.

While these risks are probably what most users are looking for, the peace of mind of a centralized platform that gives them the confidence they can trust may be enough to persuade them to enter the crypto market.