26/07/2021 Centralized Insurance Vs. Decentralized Insurance

A History Lesson on Traditional Financial Asset Insurance, and Its Drawbacks

As we’ve mentioned before, insurance is millennia old. In today’s world, insurance covers a huge variety of things. You’ve got life insurance, you have house insurance, you’ve got car insurance.

But when did we begin insuring our financial assets?

Before 1970, traders in the US were forced to take on the risk that they could suffer losses due to things like broker or dealer bankruptcy. However, due to the near collapse of financial markets during the 1969–1970 recession in the US, Congress sought to establish a means of protecting against the insolvency of brokerages.

This led Congress to create an agency called the Securities Investor Protection Corporation (SIPC), which sought to insure securities and cash left with brokerages against loss because of financial difficulties or failures. This development has proven to be incredibly important for investors and for companies over the past 50 years.

The existence of insurers in the market helped to stabilize the steady growth of global stocks, for the most part. Because of the insolvency of brokerages during the financial crisis in the late 1960s, investors were afraid of putting their money into the stock market. Introducing an agency that oversaw insurance of financial assets fought off a financial crisis at the time.

The Failures of Traditional Insurance Models

While financial asset insurance was of huge benefit to maintaining the stability of stock markets, as you might expect, there are a range of issues that arise from having insurance with a traditional, centralized insurance company.

Perhaps the most pervasive and annoying issue is the lack of clarity that consumers have when it comes to the way in which insurance companies calculate rates and premiums, as various companies have different risk models and price policies.

Another drawback to traditional insurance companies is that claims can take a hell of a long time to file, while dealing with insurance on the decentralized web should by theory be much faster and easier to calculate

Otherwise, the decentralized web offers the possibility of broad and exciting innovation that has gone hand-in-hand with Decentralized Finance. For example, when you are no longer in need of your insurance premium, it can be traded to another user as a token.

Where Decentralized Insurance Models Excel

Another brief history lesson, though much more recent this time. 2020 was a standout year for the Decentralized Finance industry, as it grew by huge amounts. The sector experienced 2000% growth over the course of the year, starting in January.

With that growth came risk, however, with a range of issues arising around the security of smart contracts, such as transaction completion failure, flash loan exploits, oracle attacks, wallet hacks, and the list goes on.

As a result, the need for decentralized insurance became obvious very quickly. Notable decentralized insurers, like Nexus Mutual, got into the market early and have been making high-profile payouts, while their total value locked (TVL) has risen to above 300 million USD.

Perhaps the first and most obvious benefit that decentralized insurance has over its more traditional centralized competitors is transparency. When you use INS3, you can take advantage of the decentralized nature of INS3, with their smart contracts able to be audited, verified and deployed on Ethereum and Conflux.

Additionally, another huge boon for decentralized insurance, as mentioned above, is the pace at which insurance filings can take is cut down immensely by the use of smart contracts on the blockchain. Another benefit is that you have the option to trade your liquid solvency capital off as an NFT when you longer need it.

The list goes on. As DeFi continues to grow and with DeFi maturing at an accelerated pace, decentralized insurance has become a much more prominent necessity for users of DeFi protocols, which not only protects users but also works to stabilize the market.

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