Let’s face it – crypto, Web3, blockchain, you name it – it’s growing fast. As a result, there is concern and skepticism surrounding volatility and the safety of digital assets, including investor funds. Would you invest your hard earned money in something without any sense of safety and security?

If we want to be honest with each other, and we certainly should be, it makes perfect sense that companies would be skeptical about putting big money into a decentralized system.

In both the fast-paced DeFi space and the “Normalverse,” there is always the risk of hacks or exploits. Enter: decentralized insurance.

“There are countless cases of smart contract hacking, cyber attacks against exchange platforms, etc. that have caused a huge loss of investor funds,” Blockchain Simplified states on Average. “Even the magnanimous DAO could not prevent a malware attack on its platform that resulted in the loss of billions. Decentralized insurance has many use cases that can help prevent such consequences.”

DeFi insurance

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

When a policyholder purchases decentralized digital asset coverage, they voluntarily participate in protecting their stake in the blockchain. The purchase of insurance comes from a “pool of money” which is 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 that locks its capital in a decentralized risk pool with other similar providers. Coverage can range from risk coverage for digital assets and smart contracts to NFT protection, DAO management and wallets – and as far 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 collateral, but have purchased insurance coverage in case there is a hack or vulnerability with the ABC smart contracts. Not only have they hedged their “bet” in this risk, they have effectively removed this risk from the ABC project.

What does this mean? This means that the risk pool built on the community allows users, projects and long-term partners to work towards a common call for safety and security. ABC Project can subsidize premiums or the risk pool to incentivize consumers to buy insurance. In this way, consumers can purchase cost-effective insurance coverage. This means that LPs have a constant stream of premiums. Ultimately, the overall risk of ABC is diversified – and the whole process is more efficient.

Decentralized Insurance: Efficiency

Efficiency comes from the community approach that decentralized insurance enables. In the Normalverse, if a business causes you harm, you usually seek compensation from their insurance policy.

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

Consider the absurdly optimistic claim that “most businesses value their customers.” Or, if you’re a little more pessimistic: businesses realize that in order to generate profit, they need to keep their customers happy.

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

Stimulating circuit

Instead, the decentralized insurance model fuels an incentive cycle. Businesses can eliminate friction and time spent on claims by working with their users (a new concept) to ensure that claims are passed directly to them without an intermediary. This frees up business time for PR and creates a fluid “disaster plan”. Plus, it shifts a lot of the risk off their plate. do you see Actual Stimulation Cycle.

This is not the only reason that a decentralized community benefits decentralized insurance. The traditional insurance industry is worth more than $5 trillion and often puts profits before people, or at least appears to put profits before people.

Building the insurance system in the chain means that you work with like-minded people. A stimulating cycle! Traditional, centralized insurers often have efficiency issues resulting from multiple sign-offs from supervisors, lengthy processes, etc., which can create delays of days or weeks in processing payments and claims.

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

Advantages of decentralized insurance

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

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

In theory, decentralized insurance providers such as Agile on the Algorand network enable less bias from claims assessors, underwriters and actuaries, a more efficient business process and a less deterrent cycle; and all while creating cost-effective and profitable risk models.

A decentralized approach to insuring digital assets is all about community. Everyone benefits from the actions of others in the community, everyone has a transparent view of the system and process, and everyone works for profitability because everyone gets a share of the insurance profit.

I’m moving forward

Of course, there is risk in the world of decentralized insurance. We cannot wrap ourselves in bubble plastic blockchain protection and send ourselves into the metaverse without risk. That’s not possible and that’s not how life works.

It is important to have 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 incumbent insurance companies to help them understand that building decentralized insurance processes does not mean a failed 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 going to say: “Stimulus circuit.”

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

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

_Source:_** beinCrypto**

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