Residents of Texas have continued to adopt cryptocurrencies and alternative finance. A 2021 poll showed that 37% of Texans would vote to make cryptocurrency legal in the State of Texas. It is estimated that 8% of Texans own some Bitcoin and the interest keeps growing. Since Texans are welcoming of cryptocurrencies and now own cryptocurrency, it is essential to know how you can keep your cryptocurrency holdings safe as a resident of Texas.
Insurance of cryptocurrency assets is broadly referred to as DeFi Insurance. However, it is essential to note that the Texas Department of Insurance does not currently regulate DeFi Insurance activities accessible to Texans.
DeFi Insurance typically differs in scope and coverage. The most common forms of DeFi Insurance products offer coverage against:
Insurance against theft or loss of assets - Some DeFi insurance products offer cover against theft or loss of assets after you have paid the appropriate premium. Some of these covers extend to funds deposited on liquidity farms or external protocols if your funds are stolen from the third parties you deposit them on.
Insurance against hacks or cyber attacks - Certain insurance protocols also provide covers against cyber attacks or hacks to you or third parties you deposited your crypto assets on.
Other insurers might offer some coverage against natural disasters or other unforeseen events.
DeFi insurance protocols work in four broad ways to provide covers to customers. In DeFi today, there are four major scopes: self-insurance, insurance via mutuals or cooperatives, parametric insurance, and traditional insurers who adapt to providing insurance covers to digital asset holders.
Self-Insurance - This is when the third party you deposit your crypto with raises an insurance fund targeted at protecting consumer funds from one or more unforeseen circumstances. In 2021, for example, Celsius, a leading lending platform, announced a self-insurance program where user funds would be protected from losses. The insurance fund was designed to be built gradually by charging users premiums.
Insurance via Mutual or Cooperatives - Nexus Mutual popularized this insurance method, and this insurance method involves several participants pooling resources together to protect against financial losses arising from different causes. In this insurance method, the risk is shared across all participants, referred to as mutuals.
Parametric Insurance - This insurance model is simply when an insurer pays out based on a specific predefined scenario. In traditional Insurance, insurers can often include vague clauses like only paying out if a customer suffers significant damage. However, significant damage in this sense is subjective and usually carries a debatable meaning. Unlike Traditional Finance, parametric insurers state a spelled-out parameter that would trigger a payout.
An example of parametric DeFi insurance is when a storm or fire destroys 15% of farmland, a payout is instantly approved to cover the loss, once the predetermined amount of loss is reached. Arbol is a prime example of an insurer utilizing the parametric insurance scope.
In DeFi Insurance, the most widespread means of insurance is the Insurance by Mutuals or cooperatives. Under this scope, all payouts and the entire model are based on DeFi Insurance pools. Firstly, an Insurance pool is a term used to describe several parties coming together to deposit resources that the Mutual would eventually use to cover losses. In DeFi, these insurance pools are decentralized and ultimately used to protect customers against losses. In Traditional Insurance, these pools are created by a centralized party; however, in DeFi, the pools can be set up and managed in a decentralized manner.
In DeFi, since the risk is spread across several participants, it is often referred to as a shared risk model. The participants in the insurance pool creation — often referred to as mutuals, control and determine the payouts to customers depending on the circumstances and the premium paid by the customer.
Often, Mutual utilizes smart contracts to automatically determine payouts based on the size of each insurance pool and the premium paid by the end-user.
However, you should also note that most of these platforms are still unregulated and prone to hacks and exploits that can result in financial losses to you as a customer. Thus, it is best only to use protocols that a premier smart contract auditing firm has appropriately audited. And still, you do not have the protection from the state of Texas or from the federal authorities.
DeFi insurance has several advantages over Traditional Insurance because of the low costs and agile nature of DeFi. More specifically, some advantages of Decentralized Insurance pools include:
They offer cheaper insurance products and premiums than traditional insurers because there are no centralized third parties needed to administer the DeFi insurance protocol in several cases.
Blockchain is an immutable ledger, and thus all participants can gain access to information recorded on the blockchain to verify the authenticity of transactions. This makes auditing very transparent, and all interested parties can establish the truth.
Some DeFi insurance protocols self-execute immediately, when specified events are triggered. The self-executing nature of smart contracts and DeFi insurance ultimately saves end-users time and energy.
DeFi insurance protocols also provide insurance coverage to several types of digital assets and scenarios, including Liquidity Provider tokens, de-pegging risk of stablecoins, custodian risk, smart contract vulnerabilities, etc.
Several DeFi insurance protocols also do not discriminate based on the jurisdiction of an end-user, thus opening up financial coverage to people that had no access to such services in previous times.
Since there is a shared risk model, mutuals can generate revenues by fees generated from premiums paid by end-users. Similarly, end-users can be confident that there would be less probability of failure since there are a lot of mutuals and no single point of failure.
Blockchain and possible synthesis with insurance have several implications. For example, new possibilities for automation of claims and payouts arise through smart contracts. This would ultimately lower the administrative cost for insurance companies.
Blockchain would also significantly improve the collation and transmission of digital evidence relevant to proving claims for insurance companies and their customers. The nature of the blockchain is trustless, which means that you do not need to place your trust into an individual, institution, or a third party - to make the decision on the claim processing and to approve the payouts. For example, Electronic Health Records relevant in examining health insurance claims can now be transmitted and verified in a trustless and quick manner. Ultimately, this can reduce the costs insurance companies take on to hire investigators when trying to payout claims.
Like the rest of the world, Texas is participating in the rise of DeFi. A 2021 survey by the United Kingdom-based firm Redfield & Wilton Strategies, showed that at least 37% of Texans favor the legalization of cryptocurrencies within the state. While there are no clear-cut numbers about the number of Texans who use DeFi insurance protocols, the top 15 worldwide insurance protocols currently cover more than $1 billion worth of digital assets. This number is expected to continue rising according to the speed of technology adoption.
When there is a need to protect an asset, the insurance industry adapts and steps in. Similarly to how Marine insurance was created in the 1600’s, to mitigate damaged and lost cargo and ships in the sea, a DeFi insurance market will only grow and mutate from this point on.
Already DeFi Insurance protocols provide a template to make Traditional Insurers more efficient, operate in a trustless manner, and shorten claim processing times. As DeFi Insurance becomes more mainstream, the traditional insurance models will need to adapt or get disrupted.
A look at what is crypto insurance and what it is not:
What Insurance Covers Cryptocurrency? Cyber Insurance are coverages that companies or individuals can buy to protect against the risk of doing business in the digital economy like data breaches, hacks, and other cyber security issues. Cyber insurance, like cryptocurrency, is a new and emerging technology. Thus there are currently limited applications of cyber insurance to cryptocurrencies. However, some companies that offer cyber insurance often include packages covering cryptocurrency ransomware payments, legal defense costs, costs associated with investigating cryptocurrency hacks, or third-party lawsuits arising from a cryptocurrency hack.
Also, unlike your bank deposits, your cryptocurrency deposits on cryptocurrency exchanges or your custodial wallet are not Federal Deposit Insurance Corporation (FDIC) insured. This is because cryptocurrencies are not yet considered legal tender in the United States.
Currently, this is an overview of trends and top three(3) players in the DeFi insurance space:
In addition, several of the insurance packages offered on Nexus Mutual provide coverage against contract bugs and economic attacks, including failure of information oracles and governance attacks. Premiums on Nexus Mutual differ depending on the mutual’s assessment of the protocol a user has deposited digital assets to and coverage type a user wishes to purchase. Premiums range from as low as 2.6% per year up to 78% per year. Each insurance product sold on Nexus Mutual also has maximum insurable amounts. Some of the products can insure crypto assets worth $600,000 or less, while some of the available products on Nexus Mutual can cover crypto assets valued at more than $70 million.
To make a claim on Nexus Mutual, an end-user must provide proof of the incurred loss and then wait about 72 hours for a Nexus Mutual accessor to make a decision. Users can make claims up to 35 days after an incident occurs, provided that the claimant had an active cover when the incident occurred. It is also important to remember that members of Nexus Mutual have the final say on which claims are paid.
While Unslashed offers insurance, claims and claims processing is handled by Kleros, a decentralized court affiliate of unslashed. After a customer files a claim, Kleros, which acts as the decentralized court, looks into the claim's authenticity and makes payments within five working days.
InsurAce Protocol - as of 2022, InsurAce Protocol was the DeFi protocol with the most expansive chain coverage. The protocol is available on Binance Smart Chain, Ethereum, Polygon Network, and Avalanche. In addition, the protocol allows users to purchase coverage for digital assets deposited across several protocols built on various chains including Ethereum, Binance Smart Chain, Polygon, Avalanche, Terra, Solana, Fantom, xDai, Arbitrum, Moonriver, HarmonyOne, Celo, Cronos, Boba, ICON, and Ontology.
Users can purchase coverage that protects against any of the following eventualities:
Smart Contract Vulnerabilities of exploits,
Stablecoin De-Pegging Risk,
Custodian Risk caused by depositing funds on centralized exchanges,
IDO Event Risk arising from rug pulls or scams
A Bundled Cover that covers more than one of these events.
InsurAce premiums range from 1% per year to 3.5% per year. To make a claim on InsurAce, the insured can submit evidence indicating loss and get their claims assessed by the InsurAce advisory board. The advisory board then recommends either paying the claimant or dismissing the claims. The final verdict is passed by the InsurAce community of assessors who vote according to the evidence provided by the insurance advisory board.
Broadly you should never forget that DeFi insurance is currently unregulated. Some insurance pools might have limited coverage capacity depending on the value of the insurance pool the protocol controls.
A Non-Fungible Token (NFT) is a unit of information stored on the blockchain. The nature of the token is such that no one can alter the information it originally contained. NFTs can also be sold, bought, or otherwise traded. Currently, the most popular forms of NFTs contain music, pictures, videos, and other graphical illustrations.
NFT thefts have continued to be on the rise. In 2022 one of the leading NFT marketplaces was compromised when a phishing attack allowed the thieves to get access to the NFT stored on the system. NFT and NFT art insurance is currently not mainstream. However, several NFT marketplaces are taking steps to procure insurance for users and traders within their marketplace. For example, Chain Guardians, a crypto gaming network, entered a partnership with Tidal Finance, an insurance protocol to protect gamers buying or selling NFTs within the game.
Also, currently, some DeFi insurance protocols provide coverage to assets deposited on a centralized exchange for custodial risks. Thus, users can utilize insurance protocols like unslashed, nexus mutual, or insurance to cover NFT art deposited on centralized exchanges like Gemini or the (now defunct) FTX.
As NFTs serve as proof of ownership to more assets, including art and other real-world assets, we can expect to see a rise in the proliferation of NFT insurers.
Life insurance is a form of insurance that ensures a designated beneficiary is paid some monetary benefit (death benefit) when an insured person dies. Life Insurance is a prevalent form of insurance in the Traditional insurance industry. However, life insurance is not yet widespread in decentralized finance.
In 2019, MetLife, a traditional life insurer, began a pilot program using blockchain to administer life insurance policies in Singapore. So with time, we can expect more companies like MetLife to use blockchain to administer life insurance around the world, and eventually in the U.S. and Texas.
No, you currently cannot pay life insurance premiums with cryptocurrencies because:
Cryptocurrency is too volatile, making it almost impossible to quantify the amount needed to cover the “real dollar” cost of providing life insurance coverage and death benefit payout.
Cryptocurrency is not yet recognized as legal tender in the United States.
Yes, since NFTs are simply unchangeable information units, we can see NFTs soon containing information regarding life insurance policies. While this is not currently in practice, we can quickly see life insurance packages distributed with NFTs, serving as proof and the document containing all policy information.